EXHIBIT 17(d)
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN LIFE INVESTMENT TRUST
Van Kampen Life Investment Trust (the "Trust") is an open-end management
investment company with eleven Portfolios (the "Portfolios"): Asset Allocation
Portfolio (formerly Multiple Strategy Fund), Comstock Portfolio, Domestic Income
Portfolio (formerly Domestic Strategic Income Fund), Emerging Growth Portfolio
(formerly Emerging Growth Fund), Enterprise Portfolio (formerly Common Stock
Fund), Global Equity Portfolio (formerly Global Equity Fund), Government
Portfolio (formerly Government Fund), Growth and Income Portfolio (formerly
Growth and Income Fund), Money Market Portfolio (formerly Money Market Fund),
Morgan Stanley Real Estate Securities Portfolio (formerly Real Estate Securities
Portfolio) and Strategic Stock Portfolio. Each Portfolio is in effect a separate
diversified mutual fund issuing its own shares.
This Statement of Additional Information is not a Prospectus. This
Statement of Additional Information should be read in conjunction with the
Portfolios' prospectuses (the "Prospectuses") dated as of the same date as this
Statement of Additional Information. This Statement of Additional Information
does not include all the information a prospective investor should consider
before purchasing shares of the Trust. Investors should obtain and read a
Prospectus containing disclosure with respect to the Portfolio in which the
investor wishes to invest prior to purchasing shares of such Portfolio. A
Prospectus may be obtained without charge by writing or calling Van Kampen Funds
Inc. (the "Distributor") at 1 Parkview Plaza, PO Box 5555, Oakbrook Terrace,
Illinois 60181-5555 at (800) 421-5666 or (800) 421-2833 for the hearing
impaired.
TABLE OF CONTENTS
PAGE
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General Information......................................... B-2
Investment Objective, Policies and Risks.................... B-7
Options, Futures Contracts and Options on Futures
Contracts................................................... B-15
Investment Restrictions..................................... B-23
Trustees and Officers....................................... B-39
Investment Advisory Agreements.............................. B-47
Distributor................................................. B-51
Transfer Agent.............................................. B-52
Portfolio Transactions and Brokerage Allocation............. B-52
Determination of Net Asset Value............................ B-55
Purchase and Redemption of Shares........................... B-56
Tax Status.................................................. B-57
Portfolio Performance....................................... B-61
Money Market Portfolio Yield Information.................... B-64
Other Information........................................... B-64
Description of Securities Ratings........................... B-65
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-32
Report of Independent Accountants........................... F-40
Financial Statements........................................ F-41
Notes to Financial Statements............................... F-75
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 28, 2000.
LIT SAI
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GENERAL INFORMATION
Van Kampen Life Investment Trust, formerly known as Van Kampen American
Capital Life Investment Trust (the "Trust"), was originally organized as a
business trust under the laws of the Commonwealth of Massachusetts on June 3,
1985 under the name American Capital Life Investment Trust. As of September 16,
1995, the Trust was reorganized as a business trust under the laws of the State
of Delaware and changed its name. On July 14, 1998, the Trust adopted its
current name.
Van Kampen Asset Management Inc. (the "Adviser" or "Asset Management"), Van
Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly-owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect, wholly-owned subsidiary
of Morgan Stanley Dean Witter & Co. ("Morgan Stanley Dean Witter"). The
principal office of the Trust, each Portfolio, the Adviser, the Distributor and
Van Kampen Investments is located at 1 Parkview Plaza, Oakbrook Terrace,
Illinois 60181-5555. The principal office of Investor Services is located at
7501 Tiffany Springs Parkway, Kansas City, Missouri 64121-8256. Morgan Stanley
Dean Witter Investment Management Inc., the subadviser for the Global Equity
Portfolio and the Morgan Stanley Real Estate Portfolio ("MSDWIM" or the
"Subadviser"), is a wholly-owned subsidiary of Morgan Stanley Dean Witter. The
principal office of the Subadviser is located at 1221 Avenue of the Americas,
New York, New York 10020.
Morgan Stanley Dean Witter is a preeminent global financial services firm
that maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services.
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share, which can be
divided into series, such as the Portfolios, and further subdivided into one or
more classes of shares of each series. Each share represents an equal
proportionate interest in the assets of the series with each other share in such
series and no interest in any other series. No series is subject to the
liabilities of any other series. The Declaration of Trust provides that
shareholders are not liable for any liabilities of the Trust or any of its
series, requires inclusion of a clause to that effect in every agreement entered
into by the Trust or any of its series and indemnifies shareholders against any
such liability.
Each Portfolio currently offers two classes of shares, designated Class I
Shares and Class II Shares. Other classes may be established from time to time
in accordance with provisions of the Declaration of Trust. Each class of shares
of a Portfolio generally are identical in all respects except that each class
bears certain distribution expenses and has exclusive voting rights with respect
to its distribution fee.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution fee for a class of a series
would be voted upon by shareholders of only the class of such series involved.
Except as otherwise described in the Prospectus or herein, shares do not have
cumulative voting rights, preemptive rights or any conversion, subscription or
exchange rights.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of majority of the shares then outstanding cast in
person or by proxy at such meeting. The Trust will assist such holders in
communicating with other shareholders of the Trust to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
The Trustees may amend the Declaration of Trust (including with respect to
any series) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any series without approval by a majority of the shares of each affected series
outstanding and entitled to vote (or such higher vote as may be required by the
1940 Act or other applicable law) and except that the Trustees cannot amend the
Declaration of Trust to impose any liability on shareholders, make any
assessment on shares or impose liabilities on the Trustees without approval from
each affected shareholder or Trustee, as the case may be.
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Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
As of April 3, 2000, no person was known by the Trust to own beneficially
or to hold of record 5% or more of the outstanding Class I Shares or Class II
Shares of any portfolio except as set forth below. The Trust offers its shares
only to separate accounts of various insurance companies. Those separate
accounts have authority to vote shares from which they have not received
instructions from the contract owners, but only in the same proportion with
respect to "yes" votes, "no" votes or abstentions as is the case with respect to
shares for which instructions were received.
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO PERCENTAGE CLASS OF
RECORD HOLDER AT APRIL 3, 2000 OWNERSHIP SHARES
------------------- -------------------------- ---------- --------
ASSET ALLOCATION PORTFOLIO
Nationwide Life Insurance Co.......... 2,362,352 49.49% I
Nationwide VL1 -- Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co.......... 2,306,638 48.33% I
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
COMSTOCK PORTFOLIO
The Travelers Sep Acct ABD2 for....... 103,940 45.97% I
Variable Annuities of
The Travelers Insurance Co.
One Tower Square 5MS
Hartford CT 06183-0002
Van Kampen Funds...................... 100,000 44.23% I
Attn: Dominick Cogliandro
1 Chase Manhattan Plz.
New York, NY 10005-1401
DOMESTIC INCOME PORTFOLIO
American General Life Insurance Co.... 420,075 19.27% I
Separate Account D
Attn. James A. Totten
P.O. Box 1591
Houston, TX 77251-1591
Nationwide Life Insurance Co.......... 170,270 7.81% I
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co.......... 472,751 21.69% I
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
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AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO PERCENTAGE CLASS OF
RECORD HOLDER AT APRIL 3, 2000 OWNERSHIP SHARES
-------------------- -------------------------- ---------- --------
Van Kampen Generations Variable Annuities.... 597,921 27.43% I
c/o American General Life Insurance Co
P.O. Box 1591
Houston, TX 77251-1591
The Travelers Separate Account for........... 343,792 15.77% I
Variable Annuities of the
Travelers Insurance Co.
One Tower Square 5MS
Hartford, CT 06183-0002
EMERGING GROWTH PORTFOLIO
Van Kampen Generations Variable Annuities.... 1,411,859 17.30% I
c/o American General Life Insurance Co.
P.O. Box 1591
Houston, TX 77251-1591
American General Annuity Ins. C.............. 759,354 9.30% I
Elite Plus
205 E. 10th Ave.
Amarillo, TX 79101-3507
The Travelers Fund BD IV..................... 408,553 5.00% I
For Variable Annuities of
The Travelers Insurance Co.
Attn: Shareholder Accounting Dept.
1 Tower Sq. #6MS
Hartford CT 06183-0002
Northbrook Life Insurance Co................. 4,604,310 56.44% I
MSDWVA II
3100 Sanders Road Station N4A
Northbrook, IL 60062-7156
ENTERPRISE PORTFOLIO
American General Life Insurance Co........... 683,103 8.72% I
Separate Account -- D
Attn. James A. Totten
P.O. Box 1591
Houston, TX 77251-1591
Nationwide Life Insurance Co................. 1,547,135 19.74% I
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co................. 1,774,233 22.64% I
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Van Kampen Generations Variable Annuities.... 1,661,548 21.20% I
c/o American General Life Insurance Co.
P.O. Box 1591
Houston, TX 77251-1591
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AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO PERCENTAGE CLASS OF
RECORD HOLDER AT APRIL 3, 2000 OWNERSHIP SHARES
------------------- -------------------------- ---------- --------
Hartford Life and Annuity Insurance
Company................................... 1,276,330 16.29% I
Separate Account Three
MSDW Select Dimensions
Attn: Carol Lewis
P.O. Box 2999
Hartford, CT 06104-2999
The Travelers Sep Acct ABD2 for............ 487,152 6.21% I
Variable Annuities of
The Travelers Insurance Co.
One Tower Square 5MS
Hartford, CT 06183-0002
GLOBAL EQUITY PORTFOLIO
Van Kampen Funds Inc....................... 95,241 31.82% I
One Chase Manhattan Plaza
37th Floor
New York, NY 10005
Nationwide Life Insurance Co............... 100,278 33.51% I
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co............... 103,715 34.66% I
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
GOVERNMENT PORTFOLIO
Nationwide Life Insurance Co............... 4,668,897 74.28% I
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Van Kampen Generations Variable Annuities.. 900,247 14.32% I
c/o American General Life Insurance Co.
P.O. Box 1591
Houston, TX 77251-1591
Nationwide Life Insurance Co............... 357,554 5.68% I
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
GROWTH AND INCOME PORTFOLIO
Van Kampen Generations Variable Annuities.. 2,861,758 77.76% I
c/o American General Life Insurance Co.
P.O. Box 1591
Houston, TX 77251-1591
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AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO PERCENTAGE CLASS OF
RECORD HOLDER AT APRIL 3, 2000 OWNERSHIP SHARES
------------------- -------------------------- ----------- --------
The Travelers Separate Account for.......... 568,295 15.44% I
Variable Annuities of the
Travelers Insurance Co.
One Tower Square JMS
Hartford, CT 06183-0002
MONEY MARKET PORTFOLIO
American General Life Insurance Co.......... 3,738,717 13.75% I
Separate Account D
Attn. James A. Totten
P.O. Box 1591
Houston, TX 77251-1591
Nationwide Life Insurance Co................ 7,254,950 26.69% I
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co................ 2,512,703 9.24% I
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Van Kampen Generations Variable Annuities.. 5,180,065 19.05% I
c/o American General Life Insurance Co.
P.O. Box 1591
Houston, TX 77251-1591
The Travelers Separate Account for.......... 6,483,753 23.85% I
Variable Annuities of the
Travelers Insurance Co.
One Tower Square JMS
Hartford, CT 06183-0002
MORGAN STANLEY REAL ESTATE SECURITIES
PORTFOLIO
Nationwide Life Insurance Co................ 7,623,520 65.32% I
Nationwide Variable Account II
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co................ 1,858,777 15.92% I
NWVA-9
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
STRATEGIC STOCK PORTFOLIO
Van Kampen Generations Variable Annuities.. 1,291,829 47.41% I
c/o American General Life Insurance Co.
P.O. Box 1591
Houston, TX 77251-1591
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AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO PERCENTAGE CLASS OF
RECORD HOLDER AT APRIL 3, 2000 OWNERSHIP SHARES
- -------------------------- ------------------------- ---------- --------
Hartford Life and Annuity Insurance Co... 1,083,925 39.78% I
Separate Account Three
MSDW Select Dimensions
Attn. Carol Lewis
P.O. Box 2999
Hartford, CT 06104-2999
INVESTMENT OBJECTIVE, POLICIES AND RISKS
The following disclosure supplements the disclosure set forth in the
prospectus and does not, standing alone, present a complete or accurate
explanation of the matters disclosed. Readers must refer also to this caption in
the Prospectuses for a complete presentation of the matters disclosed below.
REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements with broker-dealers,
banks and other financial institutions in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Portfolio) acquires ownership of a security and the seller
agrees to repurchase the obligation at a future time and set price, thereby
determining the yield during the holding period. Repurchase agreements involve
certain risks in the event of default by the other party. Each Portfolio may
enter into repurchase agreements with broker-dealers, banks and other financial
institutions deemed to be creditworthy by the Portfolio's investment adviser
under guidelines approved by the Portfolio's Board of Trustees. No Portfolio
will invest in repurchase agreements maturing in more than seven days if any
such investment, together with any other illiquid securities held by such
Portfolio, would exceed the Portfolio's limitation on illiquid securities
described herein. A Portfolio does not bear the risk of a decline in value of
the underlying security unless the seller defaults under its repurchase
obligation. In the event of the bankruptcy or other default of a seller of a
repurchase agreement, a Portfolio could experience both delays in liquidating
the underlying securities and losses including: (a) possible decline in the
value of the underlying security during the period while the Portfolio seeks to
enforce its rights thereto; (b) possible lack of access to income on the
underlying security during this period; and (c) expenses of enforcing its
rights.
For the purpose of investing in repurchase agreements, a Portfolio's
investment adviser may aggregate the cash that certain funds or portfolios
advised or subadvised by the investment adviser or certain of its affiliates
would otherwise invest separately into a joint account. The cash in the joint
account is then invested in repurchase agreements and the funds or portfolios
that contributed to the joint account share pro rata in the net revenue
generated. The investment adviser believes that the joint account produces
efficiencies and economies of scale that may contribute to reduced transaction
costs, higher returns, higher quality investments and greater diversity of
investments for the participating Portfolio than would be available to the
Portfolio investing separately. The manner in which the joint account is managed
is subject to conditions set forth in an exemptive order from the SEC permitting
this practice, which conditions are designed to ensure the fair administration
of the joint account and to protect the amounts in that account.
Repurchase agreements are fully collateralized by the underlying securities
and are considered to be loans under the 1940 Act. A Portfolio pays for such
securities only upon physical delivery or evidence of book entry transfer to the
account of a custodian or bank acting as agent. The seller under a repurchase
agreement will be required to maintain the value of the underlying securities
marked-to-market daily at not less than the repurchase price. The underlying
securities (normally securities of the U.S. government, its agencies and its
instrumentalities) may have maturity dates exceeding one year.
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FOREIGN SECURITIES
Each Portfolio that invests in securities of foreign issuers also may
purchase foreign securities in the form of American Depositary Receipts ("ADRs")
and European Depositary Receipts ("EDRs") or other securities representing
underlying shares of foreign companies. These securities may not necessarily be
denominated in the same currency as the underlying securities but generally are
denominated in the currency of the market in which they are traded. ADRs are
receipts typically issued by an American bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. ADRs are
publicly traded on exchanges or over-the-counter in the United States and are
issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of the
depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligations and the depositary's transaction fees are
paid by the ADR holders. In addition, less information generally is available
for an unsponsored ADR than about a sponsored ADR and financial information
about a company may not be as reliable for an unsponsored ADR as it is for a
sponsored ADR. The Portfolios may invest in ADRs through both sponsored and
unsponsored arrangements. EDRs are receipts issued in Europe by banks or
depositaries which evidence similar ownership arrangement.
FOREIGN CURRENCY TRANSACTIONS
Each Portfolio's securities that are denominated or quoted in currencies
other than the U.S. dollar will be affected by changes in foreign currency
exchange rates (and exchange control regulations) which affects the value of
these securities in the Portfolio and the income or dividends and appreciation
or depreciation of its investments. Changes in foreign currency exchange ratios
relative to the U.S. dollar will affect the U.S. dollar value of the Portfolio's
assets denominated in that currency and the Portfolio's yield on such assets. In
addition, the Portfolio will incur costs in connection with conversions between
various currencies. A Portfolio may purchase and sell foreign currency on a spot
basis (that is, cash basis) in connection with the settlement of transactions in
securities traded in such foreign currency. A Portfolio also may enter into
contracts with banks or other foreign currency brokers and dealers to purchase
or sell foreign currencies at a future date ("forward contracts") and purchase
and sell foreign currency futures contracts to protect against changes in
foreign currency exchange rates. A foreign currency forward contract is a
negotiated agreement between the contracting parties to exchange a specified
amount of currency at a specified future time at a specified rate. The rate can
be higher or lower than the spot rate between the currencies that are the
subject of the contract. Such foreign currency strategies may be employed before
a Portfolio purchases a foreign security traded in the currency which a
Portfolio anticipates acquiring or between the date the foreign security is
purchased or sold and the date on which payment therefore is made or received.
Hedging against a change in the value of a foreign currency in the foregoing
manner does not eliminate fluctuations in the price of portfolio securities or
prevent losses if the prices of such securities decline. Furthermore, such
transactions reduce or preclude the opportunity for gain if the value of the
currency should move in the direction opposite to the position taken.
Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such contracts.
The Portfolio's custodian will place cash or liquid securities in a segregated
account having a value equal to the aggregate amount of the Portfolio's
commitments under forward contracts. If the value of the securities placed in
the segregated account declines, additional cash or securities are placed in the
account on a daily basis so that the value of the account equals the amount of
the Portfolio's commitments with respect to such contracts. As an alternative to
maintaining all or part of the segregated account, a Portfolio may purchase a
call option permitting the Portfolio to purchase the amount of foreign currency
by a forward sale contract at a price no higher than the forward contract price
or a Portfolio may purchase a put option permitting the Portfolio to sell the
amount of foreign currency subject to a forward purchase contract at a price as
high or higher than the forward contract price.
DURATION
Duration is a measure of the expected life of a debt security that was
developed as an alternative to the concept of "term to maturity." Duration
incorporates a debt security's yield, coupon interest payments, final
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maturity and call features into one measure. Traditionally a debt security's
"term to maturity" has been used as a proxy for the sensitivity of the
security's price to changes in interest rates. However, "term to maturity"
measures only the time until a debt security provides its final payment taking
no account of the pattern of the security's payments of interest or principal
prior to maturity. Duration is a measure of the expected life of a debt security
on a present value basis expressed in years. It measures the length of the time
interval between the present and the time when the interest and principal
payments are scheduled (or in the case of a callable bond, expected to be
received), weighing them by the present value of the cash to be received at each
future point in time. For any debt security with interest payments occurring
prior to the payment of principal, duration is always less than maturity, and
for zero coupon issues, duration and term to maturity are equal. In general, the
lower the coupon rate of interest or the longer the maturity, or the lower the
yield-to-maturity of a debt security, the longer its duration; conversely, the
higher the coupon rate of interest, the shorter the maturity or the higher the
yield-to-maturity of a debt security, the shorter its duration. There are some
situations where even the standard duration calculation does not properly
reflect the interest rate exposure of a security. For example, floating and
variable rate securities often have final maturities of ten or more years;
however, their interest rate exposure corresponds to the frequency of the coupon
reset. Another example where the interest rate exposure is not properly captured
by duration is the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities' interest rate exposure. In
these and other similar situations, the Adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
MORTGAGE-RELATED SECURITIES
The Government Portfolio invests in mortgage-related securities.
Mortgage-related securities may be issued or guaranteed by an agency or
instrumentality of the U.S. government, but not necessarily by the U.S.
government itself. One type of mortgage-related security is a Government
National Mortgage Association ("GNMA") Certificate which is backed as to
principal and interest by the full faith and credit of the U.S. government.
Another type of mortgage-related security is a Federal National Mortgage
Association ("FNMA") Certificate. Principal and interest payments of FNMA
Certificates are guaranteed only by FNMA itself, not by the full faith and
credit of the U.S. government. A third type of mortgage-related security is a
Federal Home Loan Mortgage Association ("FHLMC") Participation Certificate. This
type of security is backed by FHLMC as to payment of principal and interest but,
like a FNMA security, it is not backed by the full faith and credit of the U.S.
government.
GNMA Certificates
Government National Mortgage Association. The Government National Mortgage
Association is a wholly owned corporate instrumentality of the United States
within the U.S. Department of Housing and Urban Development. GNMA's principal
programs involve its guarantees of privately issued securities backed by pools
of mortgages.
Nature of GNMA Certificates. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the Fund purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owned on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or not
the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the Portfolio
will be reinvested in additional GNMA Certificates or in other permissible
investments.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers
Home Administration or guaranteed by the Veterans Administra-
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tion ("VA"). The GNMA guarantee is backed by the full faith and credit of the
United States. GNMA is also empowered to borrow without limitation from the U.S.
Treasury if necessary to make any payments required under its guarantee.
Life of GNMA Certificates. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will result in the return of a portion of principal invested before
the maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it is
not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA are normally used as
an indicator of the expected average life of GNMA Certificates. These statistics
indicate that the average life of single-family dwelling mortgages with 25-30
year maturities (the type of mortgages backing the vast majority of GNMA
Certificates) is approximately twelve years. For this reason, it is customary
for pricing purposes to consider GNMA Certificates as 30-year mortgage-backed
securities which prepay fully in the twelfth year.
Yield Characteristics of GNMA Certificates. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather than at
par.
2. After issuance, Certificates usually trade in the secondary market at a
premium or discount.
3. Interest is paid monthly rather than semi-annually as is the case for
traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate.
If mortgagors prepay their mortgages, the principal returned to
Certificate holders may be reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a twelve-year life. Compared on this
basis, GNMA Certificates have historically yielded roughly 1/4 of 1.00% more
than high grade corporate bonds and 1/2 of 1.00% more than U.S. government and
U.S. government agency bonds. As the life of individual pools may vary widely,
however, the actual yield earned on any issue of GNMA Certificates may differ
significantly from the yield estimated on the assumption of a twelve-year life.
Market for GNMA Certificates. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
FNMA Securities
The Federal National Mortgage Association ("FNMA") was established in 1938
to create a secondary market in mortgages insured by the FHA. FNMA issues
guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a pro rata share of all principal and interest payments made and owed on the
underlying pool.
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FNMA guarantees timely payment of interest and principal on FNMA Certificates.
The FNMA guarantee is not backed by the full faith and credit of the United
States.
FHLMC Securities
The Federal Home Loan Mortgage Corporation ("FHLMC") was created in 1970 to
promote development of a nationwide secondary market in conventional residential
mortgages. The FHLMC issues two types of mortgage pass-through securities
("FHLMC Certificates"): mortgage participation certificates ("PCs") and
guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. The FHLMC guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these instruments
pay interest semi-annually and return principal once a year in guaranteed
minimum payments. The expected average life of these securities is approximately
ten years. The FHLMC guarantee is not backed by the full faith and credit of the
United States.
COLLATERALIZED MORTGAGE OBLIGATIONS
The Government Portfolio may invest in collateralized mortgage obligations.
Collateralized mortgage obligations are debt obligations issued generally by
agencies or instrumentalities of the U.S. government, or by private originators
of, or investors in, mortgages which are secured by mortgage-related securities,
including GNMA Certificates, FHLMC Certificates and FNMA Certificates, together
with certain funds and other collateral. Scheduled distributions on the
mortgage-related securities pledged to secure the collateralized mortgage
obligations, together with certain funds and other collateral and reinvestment
income thereon at an assumed reinvestment rate, will be sufficient to make
timely payments of interest on the obligations and to retire the obligations not
later than their stated maturity. Since the rate of payment of principal of any
collateralized mortgage obligation will depend on the rate of payment (including
prepayments) of the principal of the mortgage loans underlying the
mortgage-related securities, the actual maturity of the obligation could occur
significantly earlier than its stated maturity. Collateralized mortgage
obligations may be subject to redemption under certain circumstances. The rate
of interest borne by collateralized mortgage obligations may be either fixed or
floating. In addition, certain collateralized mortgage obligations do not bear
interest and are sold at a substantial discount (i.e., a price less than the
principal amount). Purchases of collateralized mortgage obligations at a
substantial discount involves a risk that the anticipated yield on the purchase
may not be realized if the underlying mortgage loans prepay at a slower than
anticipated rate, since the yield depends significantly on the rate of
prepayment of the underlying mortgages. Conversely, purchases of collateralized
mortgage obligations at a premium involve additional risk of loss of principal
in the event of unanticipated prepayments of the mortgage loans underlying the
mortgage-related securities since the premium may not have been fully amortized
at the time the obligation is repaid. The market value of collateralized
mortgage obligations purchased at a substantial premium of discount is extremely
volatile and the effects of prepayments on the underlying mortgage loans may
increase such volatility.
Although payment of the principal and interest on the mortgage-backed
certificates pledged to secure collateralized mortgage obligations may be
guaranteed by GNMA, FHLMC or FNMA, the collateralized mortgage obligations
represent obligations solely of their issuers and generally are not insured or
guaranteed by GNMA, FHLMC, FNMA or any other governmental agency or
instrumentality, or by any other person or entity. The issuers of collateralized
mortgage obligations typically have no significant assets other than those
pledged as collateral for the obligations.
LENDING OF SECURITIES
Consistent with applicable legal and regulatory requirements and applicable
investment restrictions, certain Portfolios may lend portfolio securities to
broker-dealers, banks and other recognized financial institutional borrowers of
securities provided that such loans are callable at any time by the Portfolio,
and are
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at all times secured by cash collateral that is at least equal to the market
value, determined daily, of the loaned securities. The advantage of such loans
is that the Portfolio continues to receive the interest on the loaned
securities, while at the same time earning interest on the collateral which will
be invested in short-term obligations or on an agreed-upon amount of interest
from the borrower of such security. The Portfolio may pay reasonable finders,
administrative and custodial fees in connection with loans of its securities.
There is no assurance as to the extent to which securities loans can be
effected.
If the borrower fails to maintain the requisite amount of collateral, the
loan automatically terminates, and the Portfolio could use the collateral to
replace the securities while holding the borrower liable for any excess of
replacement cost over collateral. As with any extensions of credit, there are
risks of delay in recovery and in some cases even loss of rights in the
collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms deemed by the
Adviser to be creditworthy and when the consideration which can be earned from
such loans is believed to justify the attendant risks. On termination of the
loan, the borrower is required to return the securities to the Portfolio; any
gain or loss in the market price during the loan would inure to the Portfolio.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Portfolio will follow the policy of calling the loan, whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Portfolio's investment in the
securities which are the subject of the loan.
FORWARD COMMITMENTS
Each of the Government Portfolio, Domestic Income Portfolio and Morgan
Stanley Real Estate Securities Portfolio may purchase or sell securities on a
"when-issued" or "delayed-delivery" basis ("Forward Commitments"). These
transactions occur when securities are purchased or sold by the Portfolio with
payment and delivery taking place in the future, frequently a month or more
after such transaction. The price is fixed on the date of the commitment, and
the seller continues to accrue interest on the securities covered by the Forward
Commitment until delivery and payment takes place. At the time of settlement,
the market value of the securities may be more or less than the purchase or sale
price. The Portfolio may either settle a Forward Commitment by taking delivery
of the securities or may either resell or repurchase a Forward Commitment on or
before the settlement date in which event the Portfolio may reinvest the
proceeds in another Forward Commitment.
Relative to a Forward Commitment purchase, the Portfolio maintains a
segregated account (which is marked-to-market daily) of cash or liquid
securities (which may have maturities which are longer than the term of the
Forward Commitment) with the Portfolio's custodian in an aggregate amount equal
to the amount of its commitment as long as the obligation to purchase continues.
Since the market value of both the securities subject to the Forward Commitment
and the securities held in the segregated account may fluctuate, the use of
Forward Commitments may magnify the impact of interest rate changes on the
Portfolio's net asset value.
A Forward Commitment sale is covered if the Portfolio owns or has the right
to acquire the underlying securities subject to the Forward Commitment. A
Forward Commitment sale is for cross-hedging purposes if it is not covered, but
is designed to provide a hedge against a decline in value of a security or
currency which the Portfolio owns or has the right to acquire. Only the
Government Portfolio and the Real Estate Securities Portfolio may engage in
forward commitment transactions for cross-hedging purposes. In either
circumstance, the Portfolio maintains in a segregated account (which is marked
to market daily) either the security covered by the Forward Commitment or cash
or liquid securities with the Portfolio's custodian in an aggregate amount equal
to the amount of its commitment as long as the obligation to sell continues. By
entering into a Forward Commitment sale transaction, the Portfolio foregoes or
reduces the potential for both gain and loss in the security which is being
hedged by the Forward Commitment sale.
When engaging in Forward Commitments, the Fund relies on the other party to
complete the transaction. Should the other party fail to do so, the Fund might
lose a purchase or sale opportunity that could be more
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advantageous than alternative opportunities at the time of the failure. Forward
Commitments are not traded on an exchange and thus may be less liquid than
exchange traded contracts.
INTEREST RATE TRANSACTIONS
The Government Portfolio may enter into interest rate swaps and may
purchase or sell interest rate caps, floors and collars. The Portfolio expects
to enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio. The Portfolio may also enter
into these transactions to protect against any increase in the price of
securities the Portfolio anticipates purchasing at a later date. The Portfolio
does not intend to use these transactions as speculative investments and will
not enter into interest rate swaps or sell interest rate caps or floors where it
does not own or have the right to acquire the underlying securities or other
instruments providing the income stream the Portfolio may be obligated to pay.
Interest rate swaps involve the exchange by the Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed-rate payments. The purchase of an interest rate
cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from the
party selling the interest rate floor. An interest rate collar combines the
elements of purchasing a cap and selling a floor. The collar protects against an
interest rate rise above the maximum amount but foregoes the benefit of an
interest rate decline below the minimum amount. Interest rate swaps, caps,
floors and collars may be treated as illiquid securities and be subject to the
Portfolio's investment restriction limiting investment in illiquid securities.
The Portfolio may enter into interest rate swaps, caps, floors and collars
on either an asset-based or liability-based basis, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, with the Portfolio receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if any, of the
Portfolio's obligations over its entitlements with respect to each interest rate
swap will be accrued on a daily basis and an amount of cash or liquid securities
having an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Portfolio's custodian. If the
Portfolio enters into an interest rate swap on other than a net basis, the
Portfolio would maintain a segregated account in the full amount accrued on a
daily basis of the Portfolio's obligations with respect to the swap. Interest
rate transactions do not constitute senior securities under the 1940 Act when
the Portfolio segregates assets to cover the obligations under the transactions.
The Portfolio will enter into interest rate swap, cap or floor transactions only
with counterparties approved by the Portfolio's Board of Trustees. The Adviser
will monitor the creditworthiness of counterparties to its interest rate swap,
cap, floor and collar transactions on an ongoing basis. If there is a default by
the other party to such a transaction, the Portfolio will have contractual
remedies pursuant to the agreements related to the transaction. To the extent
the Portfolio sells (i.e., writes) caps, floors and collars, it will maintain in
a segregated account cash or liquid securities having an aggregate net asset
value at least equal to the full amount, accrued on a daily basis, of the
Portfolio's net obligations with respect to the caps, floors or collars. The use
of interest rate swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of the market values, interest rates and other applicable factors, the
investment performance of the Portfolio would diminish compared with what it
would have been if these investment techniques were not used. The use of
interest rate swaps, caps, collars and floors may also have the effect of
shifting the recognition of income between current and future periods.
These transactions do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Portfolio is contractually obligated to make. If the other party to an interest
rate swap defaults, the Portfolio's risk of loss consists of the net amount of
interest payments that the Portfolio contractually is entitled to receive.
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PORTFOLIO TURNOVER
A Portfolio's turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Portfolio's portfolio securities during such fiscal year.
The turnover rate may vary greatly from year to year as well as within a year.
ILLIQUID SECURITIES
Each Portfolio, subject to its investment restrictions, may invest a
portion of its assets in illiquid securities, which includes securities that are
not readily marketable, repurchase agreements which have a maturity of longer
than seven days and generally includes securities that are restricted from sale
to the public without registration under the Securities Act of 1933, as amended
(the "1933 Act"). The sale of such securities often requires more time and
results in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of liquid securities trading on national securities
exchanges or in over-the-counter markets. Restricted securities are often
purchased at a discount from the market price of unrestricted securities of the
same issuer reflecting the fact that such securities may not be readily
marketable without some time delay. Investments in securities for which market
quotations are not readily available are valued at fair value as determined in
good faith by the Adviser in accordance with procedures approved by the
Portfolio's Board of Trustees. Ordinarily, the Portfolio would invest in
restricted securities only when it receives the issuer's commitment to register
the securities without expense to the Portfolio. However, registration and
underwriting expenses (which typically range from 7% to 15% of the gross
proceeds of the securities sold) may be paid by the Portfolio. Restricted
securities which can be offered and sold to qualified institutional buyers under
Rule 144A under the 1933 Act ("144A Securities") and are determined to be liquid
under guidelines adopted by and subject to the supervision of the Portfolio's
Board of Trustees are not subject to the limitation on illiquid securities. Such
144A Securities are subject to monitoring and may become illiquid to the extent
qualified institutional buyers become, for a time, uninterested in purchasing
such securities. Factors used to determine whether 144A Securities are liquid
include, among other things, a security's trading history, the availability of
reliable pricing information, the number of dealers making quotes or making a
market in such security and the number of potential purchasers in the market for
such security. For purposes hereof, investments by the Portfolio in securities
of other investment companies will not be considered investments in restricted
securities to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief (such as "no
action" letters issued by the staff of the SEC interpreting or providing
guidance on the 1940 Act or the regulations thereunder) from the provisions of
the 1940 Act, as amended from time to time.
MONEY MARKET PORTFOLIO
The Money Market Portfolio seeks to maintain a net asset value of $1.00 per
share. To do so, the Portfolio uses the amortized cost method of valuing the
Portfolio's securities pursuant to Rule 2a-7 under the 1940 Act, certain
requirements of which are summarized below.
In accordance with Rule 2a-7, the Portfolio is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of thirteen months or less and invest
only in U.S. dollar denominated securities determined in accordance with
procedures established by the Portfolio's Board of Trustees to present minimal
credit risks and which are rated in one of the two highest rating categories for
debt obligations by at least two nationally recognized statistical rating
organizations (or one rating organization if the instrument was rated by only
one such organization) or, if unrated, are of comparable quality as determined
in accordance with procedures established by the Portfolio's Board of Trustees.
In addition, the Portfolio will not invest more than 5% of its total assets
in the securities (including the securities collateralizing a repurchase
agreement) of, or subject to puts issued by, a single issuer, except that (i)
the Portfolio may invest more than 5% of its total assets in a single issuer for
a period of up to three
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business days in certain limited circumstances, (ii) the Portfolio may invest in
obligations issued or guaranteed by the U.S. government without any such
limitation, and (iii) the limitation with respect to puts does not apply to
unconditional puts if no more than 10% of the Portfolio's total assets are
invested in securities issued or guaranteed by the issuer of the unconditional
put. Investments in rated securities not rated in the highest category by at
least two rating organizations (or one rating organization if the instrument was
rated by only one such organization), and unrated securities not determined by
the Portfolio's Board of Trustees to be comparable to those rated in the highest
category, will be limited to 5% of the Portfolio's total assets, with the
investment in any one such issuer being limited to no more than the greater of
1% of the Portfolio's total assets or $1,000,000. As to each security, these
percentages are measured at the time the Portfolio purchases the security. There
can be no assurance that the Portfolio will be able to maintain a stable net
asset value of $1.00 per share.
STRATEGIC STOCK PORTFOLIO
The Strategic Stock Portfolio invests primarily in dividend paying equity
securities of companies included in the DJIA or in the MSCI USA Index (each as
defined in the Strategic Stock Portfolio Prospectus). In selecting securities
for the Portfolio, the Adviser presently intends to follow the following
procedures, subject to and limited by the Portfolio's other investment policies
and restrictions.
The Portfolio will reflect on its books twelve separate sub-accounts (each
a "Strategic Sub-Account"). Strategic Sub-Accounts will be successively
designated Strategic Sub-Account 1 through Strategic Sub-Account 12.
As of the close of business on (i) the business day immediately prior to
the Portfolio's commencement of investment operations and (ii) the last business
day of each month thereafter (each a "Strategic Determination Date"), the
Adviser will identify 20 securities pursuant to the Strategic Selection Policies
discussed in the Strategic Stock Portfolio Prospectus (the "Current Period
Strategic Securities").
As of commencement of investment operations, the Portfolio invested the
assets of Strategic Sub-Account 1 approximately equally in each of the Current
Period Strategic Securities determined on the first Strategic Determination
Date. This resulted in approximately 5% of the Portfolio's assets being invested
in each of the initial Current Period Strategic Securities. On each of the
eleven subsequent Strategic Determination Dates, the Adviser invested the cash
available for investment due to the sale of new shares and the receipt of
dividend and interest income in the next successive Strategic Sub-Account
approximately equally in each of the Current Period Strategic Securities for
that Strategic Determination Date. Following the twelfth Strategic Determination
Date the assets of one Strategic Sub-Account will be evaluated and adjusted each
month so that the assets of each Strategic Sub-Account will be reviewed and
adjusted once every 12 months.
Consistent with the Portfolio's investment objective, the Adviser may
modify these procedures without prior notice to investors to adjust the
frequency of portfolio review and adjustment and to adjust the portion of the
Portfolio's assets that is reviewed and adjusted during each period.
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Each of the Portfolios, except the Domestic Income Portfolio and the Money
Market Portfolio, may, but is not required to, use various investment strategic
transaction as described below to earn income, facilitate portfolio management
and mitigate risks. Techniques and instruments may change over time as new
instruments or strategies are developed or regulatory changes occur. Although
the Adviser seeks to use these transactions to further a Portfolio's investment
objective(s), no assurance can be given that the use of these transactions will
achieve that result.
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WRITING CALL AND PUT OPTIONS
Purpose. Options may be utilized to hedge various market or to obtain,
through receipt of premiums, a greater current return than would be realized on
the underlying securities alone. The Portfolio's current return can be expected
to fluctuate because premiums earned from an option writing program and dividend
or interest income yields on portfolio securities vary as economic and market
conditions change. Writing options on portfolio securities also is likely to
result in a higher portfolio turnover.
Writing Options. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. Each Portfolio writes call
options only on a covered basis and only the Government Portfolio and Comstock
Portfolio write call options either on a covered basis or for cross-hedging
purposes. A call option is covered if at all times during the option period the
Portfolio owns or has the right to acquire securities of the type that it would
be obligated to deliver if any outstanding option were exercised. Thus, the
Government Portfolio may write options on mortgage-related or other U.S.
government securities or forward commitments of such securities. An option is
for cross-hedging purposes if it is not covered, but is designed to provide a
hedge against a security which a Portfolio owns or has the right to acquire. In
such circumstances, a Portfolio collateralizes the option by maintaining in a
segregated account with a Portfolio's custodian, cash or liquid securities in an
amount not less than the market value of the underlying security, marked to
market daily, while the option is outstanding.
The purchaser of a put option pays a premium to the writer (i.e., the
seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. A Portfolio would write put options
only on a secured basis, which means that, at all times during the option
period, the Portfolio would maintain in a segregated account with its custodian
cash or liquid securities in an amount of not less than the exercise price of
the option, or would hold a put on the same underlying security at an equal or
greater exercise price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, a Portfolio could
enter into a "closing purchase transaction," which is the purchase of a call
(put) on the same underlying security and having the same exercise price and
expiration date as the call (put) previously written by the Portfolio. The
Portfolio would realize a gain (loss) if the premium plus commission paid in the
closing purchase transaction is lesser (greater) than the premium it received on
the sale of the option. A Portfolio would also realize a gain if an option it
has written lapses unexercised.
A Portfolio could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. A
Portfolio could close out its position as writer of an option only if a liquid
secondary market exists for options of that series, but there is no assurance
that such a market will exist, particularly in the case of over-the-counter
options, since they can be closed out only with the other party to the
transaction. Alternatively, a Portfolio could purchase an offsetting option,
which would not close out its position as a writer, but would provide an asset
of equal value to its obligation under the option written. If a Portfolio is not
able to enter into a closing purchase transaction or to purchase an offsetting
option with respect to an option it has written, it will be required to maintain
the securities subject to the call or the collateral underlying the put until a
closing purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so. The staff of the
SEC currently takes the position that, in general, over-the-counter options on
securities purchased by a Portfolio and portfolio securities "covering" the
amount of such Portfolio's obligation pursuant to an over-the-counter option
sold by it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Portfolio's limitation on illiquid securities
described herein.
The exercise price of call options may be below ("in-the-money"), equal to
("at-the-money"), or above ("out-of-the-money") the current market value of the
underlying securities or futures contracts at the time the options are written.
The converse applies to put options.
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Risks of Writing Options. By writing a call option, a Portfolio loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Portfolio might become
obligated to purchase the underlying security at an exercise price that exceeds
the then current market price.
PURCHASING CALL AND PUT OPTIONS
A Portfolio could purchase call options to protect against anticipated
increases in the prices of securities it wishes to acquire. In addition, the
Comstock Portfolio, the Emerging Growth Portfolio, the Enterprise Portfolio, the
Growth and Income Portfolio, the Real Estate Securities Portfolio and the
Strategic Stock Portfolio may purchase call options for capital appreciation.
Since the premium paid for a call option is typically a small fraction of the
price of the underlying security, a given amount of funds will purchase call
options covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, a Portfolio could benefit from any
significant increase in the price of the underlying security to a greater extent
than had it invested the same amount in the security directly. However, because
of the very high volatility of option premiums, a Portfolio would bear a
significant risk of losing the entire premium if the price of the underlying
security did not rise sufficiently, or if it did not do so before the option
expired.
Put options may be purchased to protect against anticipated declines in the
market value of either specific portfolio securities or of a Portfolio's assets
generally. In addition, the Comstock Portfolio, the Emerging Growth Portfolio,
the Enterprise Portfolio, the Growth and Income Portfolio, the Real Estate
Securities Portfolio and the Strategic Stock Portfolio may purchase put options
for capital appreciation in anticipation of a price decline in the underlying
security and a corresponding increase in the value of the put option. The
purchase of put options for capital appreciation involves the same significant
risk of loss as described above for call options.
In any case, the purchase of options for capital appreciation would
increase a Portfolio's volatility by increasing the impact of changes in the
market price of the underlying securities on the Portfolio's net asset value.
The Government Portfolio will not purchase call or put options on
securities if as a result, more than 10% of its net assets would be invested in
premiums on such options.
A Portfolio may purchase either listed or over-the-counter options.
RISK FACTORS APPLICABLE TO OPTIONS ON U.S. GOVERNMENT SECURITIES
Treasury Bonds and Notes. Because trading interest in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the exchanges will not continue indefinitely to introduce options with new
expirations to replace expiring options on particular issues. Instead, the
expirations introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition of a
limited number of new expirations as the original ones expire. Options trading
on each issue of bonds or notes will thus be phased out as new options are
listed on more recent issues, and options representing a full range of
expirations will not ordinarily be available for every issue on which options
are traded.
Treasury Bills. Because the deliverable Treasury bill changes from week to
week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Portfolio holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Portfolio will
hold the Treasury bills in a segregated account with its custodian so that it
will be treated as being covered.
Mortgage-Related Securities. The following special considerations will be
applicable to options on mortgage-related securities. Currently such options are
only traded over-the-counter. Since the remaining principal balance of a
mortgage-related security declines each month as a result of mortgage payments,
the Portfolio as a writer of a mortgage-related call holding mortgage-related
securities as "cover" to satisfy its
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delivery obligation in the event of exercise may find that the mortgage-related
securities it holds no longer have a sufficient remaining principal balance for
this purpose. Should this occur, the Portfolio will purchase additional
mortgage-related securities from the same pool (if obtainable) or replacement
mortgage-related securities in the cash market in order to maintain its cover. A
mortgage-related security held by the Portfolio to cover an option position in
any but the nearest expiration month may cease to represent cover for the option
in the event of a decline in the coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. If this should occur,
the Portfolio will no longer be covered, and the Portfolio will either enter
into a closing purchase transaction or replace such mortgage-related security
with a mortgage-related security which represents cover. When the Portfolio
closes its position or replaces such mortgage-related security, it may realize
an unanticipated loss and incur transaction costs.
OPTIONS ON STOCK INDEXES (ASSET ALLOCATION PORTFOLIO, COMSTOCK PORTFOLIO,
EMERGING GROWTH PORTFOLIO, ENTERPRISE PORTFOLIO, GLOBAL EQUITY PORTFOLIO, GROWTH
AND INCOME PORTFOLIO, REAL ESTATE SECURITIES PORTFOLIO AND STRATEGIC STOCK
PORTFOLIO ONLY)
Options on stock indexes are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash which amount will depend upon the closing
level of the stock index upon which the option is based being greater than (in
the case of a call) or less than (in the case of a put) the exercise price of
the option. The amount of cash received will be the difference between the
closing price of the index and the exercise price of the option, multiplied by a
specified dollar multiple. The writer of the option is obligated, in return for
the premium received, to make delivery of this amount.
Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indices are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. A stock index fluctuates with changes in the
market values of the stocks included in the index. Options are currently traded
on The Chicago Board Options Exchange, the American Stock Exchange and other
exchanges.
Gain or loss to a Portfolio on transactions in stock index options will
depend on price movements in the stock market generally (or in a particular
industry or segment of the market) rather than price movements of individual
securities. As with stock options, the Portfolio may offset its position in
stock index options prior to expiration by entering into a closing transaction
on an exchange, or it may let the option expire unexercised.
FOREIGN CURRENCY OPTIONS
Certain Portfolios may purchase put and call options on foreign currencies
to reduce the risk of currency exchange fluctuation. Premiums paid for such put
and call options will be limited to no more than 5% of the Portfolio's net
assets at any given time. Options on foreign currencies operate similarly to
options on securities, and are traded primarily in the over-the-counter market,
although options on foreign currencies are traded on certain United States and
foreign exchanges. Exchange-traded options are expected to be purchased by the
Portfolio from time to time and over-the-counter options may also be purchased,
but only when the Adviser believes that a liquid secondary market exists for
such options, although there can be no assurance that a liquid secondary market
will exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence foreign exchange
rates and investment generally.
The value of a foreign currency option is dependent upon the value of the
underlying foreign currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or both
currencies and has no relationship to the investment merits of a foreign
security. Because foreign currency transactions occurring in the interbank
market (conducted directly between currency traders, usually large commercial
banks, and their customers) involve substantially larger amounts than those that
may be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an
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odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Quotation information available is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (i.e., less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
FUTURES CONTRACTS
Certain Portfolios may engage in transactions involving futures contracts
and related options in accordance with rules and interpretations of the
Commodity Futures Trading Commission ("CFTC") under which the Trust and its
Portfolios would be exempt from registration as a "commodity pool."
Types of Contracts. An interest rate futures contract is an agreement
pursuant to which a party agrees to take or make delivery of a specified debt
security (such as U.S. Treasury bonds, U.S. Treasury notes, U.S. Treasury bills
and GNMA Certificates) at a specified future time and at a specified price.
Interest rate futures contracts also include cash settlement contracts based
upon a specified interest rate such as the London interbank offering rate for
dollar deposits, LIBOR.
A stock index futures contract is an agreement pursuant to which a party
agrees to take or make delivery of cash equal to a specified dollar amount times
the difference between the stock index value at a specified time and the price
at which the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made. Currently, stock index futures contracts
can be purchased with respect to several indices on various exchanges.
Differences in the stocks included in the indexes may result in differences in
correlation of the futures contracts with movements in the value of the
securities being hedged.
A Portfolio also may invest in foreign stock index futures traded outside
the United States which involve additional risks, including fluctuations in
foreign exchange rates, future foreign political and economic developments, and
the possible imposition of exchange controls or other foreign or United States
governmental laws or restrictions applicable to such investments.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, a Portfolio is required to deposit with its custodian in an
account in the broker's name an amount of cash or liquid securities equal to a
percentage (which will normally range between 2% and 10%) of the contract
amount. This amount is known as initial margin. The nature of initial margin in
futures transactions is different from that of margin in securities transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is in the nature
of a performance bond or good faith deposit on the contract, which is returned
to the Portfolio upon termination of the futures contract and satisfaction of
its contractual obligations. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the underlying
securities or index fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as marking to market.
For example, when a Portfolio purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Portfolio receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Portfolio purchases a futures contract
and the value of the underlying security or index declines, the position is less
valuable, and the Portfolio is required to make a variation margin payment to
the broker.
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At any time prior to expiration of the futures contract, the Portfolio may
elect to terminate the position by taking an opposite position. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Portfolio, and the Portfolio realizes a loss or a
gain.
Futures Strategies. When a Portfolio anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Portfolio is
otherwise fully invested ("anticipatory hedge"). Such purchase of a futures
contract serves as a temporary substitute for the purchase of individual
securities, which may be purchased in an orderly fashion once the market has
stabilized. As individual securities are purchased, an equivalent amount of
futures contracts could be terminated by offsetting sales. A Portfolio may sell
futures contracts in anticipation of or in a general market or market sector
decline that may adversely affect the market value of the Portfolio's securities
("defensive hedge"). To the extent that the Portfolio's portfolio of securities
changes in value in correlation with the underlying security or index, the sale
of futures contracts substantially reduces the risk to a Portfolio of a market
decline and, by so doing, provides an alternative to the liquidation of
securities positions in the Portfolio with attendant transaction costs.
Ordinarily transaction costs associated with futures transactions are lower than
transaction costs that would be incurred in the purchase and sale of the
underlying securities.
Special Risks Associated with Futures Transactions. There are several risks
connected with the use of futures contracts. These include the risk of imperfect
correlation between movements in the price of the futures contracts and of the
underlying securities or index; the risk of market distortion; the risk of
illiquidity risks and the risk of error in anticipating price movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for this imperfect correlation, a Portfolio could buy or sell futures contracts
in a greater dollar amount than the dollar amount of securities being hedged if
the historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, a Portfolio could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of the securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contract. It is also possible that the
value of futures contracts held by a Portfolio could decline at the same time as
portfolio securities being hedged; if this occurred, the Portfolio would lose
money on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities, currency or index
underlying the futures contract due to certain market distortions. First, all
participants in the futures market are subject to margin depository and
maintenance requirements. Rather than meet additional margin depositary
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the futures
market and the securities or index underlying the futures contract. Second, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities markets. Therefore,
increased participation by speculators in the futures markets may cause
temporary price distortions. Due to the possibility of price distortion in the
futures markets and because of the imperfect correlation between movements in
futures contracts and movements in the securities underlying them, a correct
forecast of general market trends by the Adviser may still not result in a
successful hedging transaction.
There is also the risk that futures markets may not be sufficiently
liquid.contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although a Portfolio intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, a
Portfolio would continue to be required to make daily
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payments of variation margin. Since the securities being hedged would not be
sold until the related futures contract is sold, an increase, if any, in the
price of the securities may to some extent offset losses on the related futures
contract. In such event, the Portfolio would lose the benefit of the
appreciation in value of the securities.
Successful use of futures is also subject to the Advisers' ability
correctly to predict the direction of movements in the market. For example, if
the Portfolio hedges against a decline in the market, and market prices instead
advance, the Portfolio will lose part or all of the benefit of the increase in
value of its securities holdings because it will have offsetting losses in
futures contracts. In such cases, if the Portfolio has insufficient cash, it may
have to sell portfolio securities at a time when it is disadvantageous to do so
in order to meet the daily variation margin.
Although the Portfolio intends to enter into futures contracts only if
there is an active market for such contracts, there is no assurance that an
active market will exist for the contracts at any particular time. Most U.S.
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Portfolio would be required to make daily cash
payments of variation margin. In such circumstances, an increase in the value of
the portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, there is no guarantee that the
price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.
A Portfolio will not enter into a futures contract or option (except for
closing transactions) for other than for bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options would exceed 5% of the Portfolio's total
assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. Certain state securities laws to
which a Portfolio may be subject may further restrict the Portfolio's ability to
engage in transactions in futures contracts and related options. In order to
prevent leverage in connection with the purchase of futures contracts by a
Portfolio, an amount of cash or liquid securities equal to the market value of
the obligation under the futures contracts (less any related margin deposits)
will be maintained in a segregated account with the custodian.
OPTIONS ON FUTURES CONTRACTS
A Portfolio could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, a Portfolio is subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by a Portfolio are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. A Portfolio could purchase put options on futures contracts in lieu of,
and for the same purposes as the sale of a futures contract; at the same time,
it could write put options at a lower strike price (a "put bear spread") to
offset part of the cost of the strategy to the Portfolio. The purchase of call
options on futures contracts is intended to serve the same purpose as the actual
purchase of the futures contract.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Adviser will not purchase
options on futures on any exchange unless, in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to a
Portfolio because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However there may be circumstances, such as when there
is no movement in the level of
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the index, when the use of an option on a future would result in a loss to the
Portfolio when the use of a future would not.
ADDITIONAL RISKS OF OPTIONS AND FUTURES TRANSACTIONS
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be sold by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Adviser are combined for purposes of these
limits. An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the
Portfolio may write.
In the event of the bankruptcy of a broker through which a Portfolio
engages in transactions in options, futures or related options, the Portfolio
could experience delays or losses in liquidating open positions purchased or
incur a loss of all or part of its margin deposits with the broker. Transactions
are entered into by a Portfolio only with brokers or financial institutions
deemed creditworthy by the Adviser.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS
ON FOREIGN CURRENCIES
Unlike transactions entered into by a Portfolio in futures contracts,
options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the Securities and Exchange Commission ("SEC"). To the contrary,
such instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. Similarly, options on
currencies may be traded over-the-counter. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could, therefore, continue to an unlimited extent over
a period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the option seller and a trader of forward contracts could
lose amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions, on exercise.
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In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many derivative transactions, in addition to other requirements, require
that a Portfolio segregate cash and liquid securities with its custodian to the
extent such Portfolio's obligations are not otherwise "covered" as described
above. In general, either the full amount of any obligation by a Portfolio to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered (or securities
convertible into the needed securities without additional consideration), or,
subject to applicable regulatory restrictions, an amount of cash or liquid
securities at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. In the case of a futures contract or an
option thereon, a Portfolio must deposit initial margin and possible daily
variation margin in addition to segregating cash and liquid securities
sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Derivative transactions may be covered by other means when
consistent with applicable regulatory policies. A Portfolio may also enter into
offsetting transactions so that its combined position, coupled with any
segregated cash and liquid securities, equals its net outstanding obligation.
INVESTMENT RESTRICTIONS
Each Portfolio has adopted the following restrictions which may not be
changed without shareholder approval by the vote of a majority of its
outstanding voting shares; which is defined by the 1940 Act as the lesser of (i)
67% or more of the voting securities present at a meeting, if the holders of
more than 50% of the outstanding voting securities of the Portfolio are present
or represented by proxy; or (ii) more than 50% of the Portfolio's outstanding
voting securities. The percentage limitations contained in the restrictions and
policies set forth herein apply at the time of purchase of securities. With
respect to the limitations on illiquid securities and borrowings, the
limitations apply at the time of purchase and on an ongoing basis. The
Portfolios are subject to the restrictions set forth below. (Those restrictions
that are only applicable to certain Portfolios are noted as such.)
THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE ASSET ALLOCATION PORTFOLIO, THE
DOMESTIC INCOME PORTFOLIO, THE EMERGING GROWTH PORTFOLIO, THE ENTERPRISE
PORTFOLIO, THE GLOBAL EQUITY PORTFOLIO, THE GOVERNMENT PORTFOLIO, THE GROWTH AND
INCOME PORTFOLIO AND THE MONEY MARKET PORTFOLIO:
A Portfolio shall not:
1. Invest in securities of any company if any officer or trustee of the
Portfolio or of the Adviser owns more than 1/2 of 1% of the outstanding
securities of such company, and such officers and trustees own more than
5% of the outstanding securities of such issuer.
2. Invest in companies for the purpose of acquiring control or management
thereof except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
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3. Underwrite securities of other companies, except insofar as a Portfolio
might be deemed to be an underwriter for purposes of the Securities Act
of 1933 in the resale of any securities owned by the Portfolio.
4. Lend its portfolio securities in excess of 10% of its total assets, both
taken at market value provided that any loans shall be in accordance
with the guidelines established for such loans by the Board of Trustees
of the Trust as described under "Investment Practices--Lending of
Securities" including the maintenance of collateral from the borrower
equal at all times to the current market value of the securities loaned.
THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE ASSET ALLOCATION
PORTFOLIO AND THE ENTERPRISE PORTFOLIO:
A Portfolio shall not:
1. With respect to 75% of its assets, invest more than 5% of its assets in
the securities of any one issuer (except obligations of the United
States Government, its agencies or instrumentalities and repurchase
agreements secured thereby) or purchase more than 10% of the outstanding
voting securities of any one issuer except that the Portfolio may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
2. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
3. Make any investment in real estate, commodities or commodities
contracts, except that the Portfolio may enter into transactions in
options, futures contracts or options on futures contracts and may
purchase securities secured by real estate or interests therein; or
issued by companies, including real estate investment trusts, which
invest in real estate or interests therein.
4. Invest in interests in oil, gas, or other mineral exploration or
development programs.
5. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than 5%
of the Portfolio's assets would be invested in such securities except
that the Portfolio may purchase securities of other investment companies
to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the
1940 Act, as amended from time to time, or (iii) an exemption or other
relief from the provisions of the 1940 Act.
6. Lend money, except that a Portfolio may invest in repurchase agreements
in accordance with applicable requirements set forth in the Prospectus
and may acquire debt securities which the Portfolio's investment
policies permit. A Portfolio will not invest in repurchase agreements
maturing in more than seven days (unless subject to a demand feature) if
any such investment, together with any illiquid securities (including
securities which are subject to legal or contractual restrictions on
resale) held by the Portfolio, exceeds 10% of the market or other fair
value of its total net assets; provided, however, that this limitation
excludes shares of other open-end investment companies owned by the
Portfolio but includes the Portfolio's pro rata portion of the
securities and other assets owned by any such investment company. See
"Repurchase Agreements" in the Prospectus and herein.
7. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United
States government, its agencies or instrumentalities and repur-
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chase agreements secured thereby); provided, however, that this
limitation excludes shares of other open-end investment companies owned
by the Portfolio but includes the Portfolio's pro rata portion of the
securities and other assets owned by any such investment company.
8. Make short sales of securities, unless at the time of the sale the
Portfolio owns or has the right to acquire an equal amount of such
securities. Notwithstanding the foregoing, the Portfolio may engage in
transactions in options, futures contracts and options on futures
contracts.
9. Purchase securities on margin, except that a Portfolio may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. The deposit or payment by the Portfolio of
initial or maintenance margin in connection with transactions in
options, futures contracts or options on futures contracts is not
considered the purchase of a security on margin.
10. Invest more than 5% of its assets in companies having a record,
together with predecessors, of less than three years continuous
operation except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii)
an exemption or other relief from the provisions of the 1940 Act.
11. Borrow in excess of 10% of the market or other fair value of its total
assets, or pledge its assets to an extent greater than 5% of the market
or other fair value of its total assets. Any such borrowings shall be
from banks and shall be undertaken only as a temporary measure for
extraordinary or emergency purposes. Deposits in escrow in connection
with the writing of covered call or secured put options, or in
connection with the purchase or sale of futures contracts and related
options are not deemed or to be a pledge or other encumbrance.
In addition, the following restrictions apply to, and may not be changed
without the approval of the holders of a majority of the shares of, the
Portfolio indicated:
The Enterprise Portfolio may not invest more than 5% of its net assets
in warrants or rights valued at the lower of cost or market, nor more than
2% of its net assets in warrants or rights (valued on such basis) which are
not listed on the New York or American Stock Exchanges. Warrants or rights
acquired in units or attached to other securities are not subject to the
foregoing limitation. Furthermore, the Enterprise Portfolio may not invest
in the securities of a foreign issuer if, at the time of acquisition, more
than 10% of the value of the Enterprise Portfolio's total assets would be
invested in such securities. Foreign investments may be subject to special
risks, including future political and economic developments, the possible
imposition of additional withholding taxes on dividend or interest income
payable on the securities, or the seizure or nationalization of companies,
or establishment of exchange controls or adoption of other restrictions
which might adversely affect the investment.
The Asset Allocation Portfolio may not invest in the securities of a
foreign issuer if, at the time of acquisition, more than 25% of the value
of the Asset Allocation Portfolio's total assets would be invested in such
securities.
THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE DOMESTIC INCOME
PORTFOLIO:
The Domestic Income Portfolio shall not:
1. With respect to 75% of its assets, invest more than 5% of its assets in
the securities of any one issuer (except obligations of the United
States government, its agencies or instrumentalities and repurchase
agreements secured thereby) or purchase more than 10% of the outstanding
voting securities of any one issuer except that the Portfolio may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
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2. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
3. Make any investment in real estate, commodities or commodities
contracts, except that the Portfolio may purchase securities secured by
real estate or interests therein; or issued by companies, including real
estate investment trusts, which invest in real estate or interests
therein.
4. Invest in interests in oil, gas, or other mineral exploration or
development programs.
5. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than 5%
of the Portfolio's assets would be invested in such securities except
that the Portfolio may purchase securities of other investment companies
to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the
1940 Act, as amended from time to time, or (iii) an exemption or other
relief from the provisions of the 1940 Act.
6. Lend money, except that the Portfolio may invest in repurchase
agreements in accordance with applicable requirements set forth in the
Prospectus and may acquire debt securities which the Portfolio's
investment policies permit. The Portfolio will not invest in repurchase
agreements maturing in more than seven days (unless subject to a demand
feature) if any such investment, together with any illiquid securities
(including securities which are subject to legal or contractual
restrictions on resale) held by the Portfolio, exceeds 10% of the market
or other fair value of its total net assets. See "Repurchase Agreements"
in the Prospectus and herein.
7. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United
States government, its agencies or instrumentalities and repurchase
agreements secured thereby).
8. Make short sales of securities, unless at the time of the sale the
Portfolio owns or has the right to acquire an equal amount of such
securities.
9. Purchase securities on margin, except that the Portfolio may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities.
10. Invest more than 5% of its assets in companies having a record, together
with predecessors, of less than three years continuous operation except
that the Portfolio may purchase securities of other investment companies
to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the
1940 Act, as amended from time to time, or (iii) an exemption or other
relief from the provisions of the 1940 Act.
11. Write put or call options.
12. Borrow in excess of 10% of the market or other fair value of its total
assets, or pledge its assets to an extent greater than 5% of the market
or other fair value of its total assets. Any such borrowings shall be
from banks and shall be undertaken only as a temporary measure for
extraordinary or emergency purposes. Deposits in escrow in connection
with the writing of covered call or secured put options, or in
connection with the purchase or sale of futures contracts and related
options are not deemed or to be a pledge or other encumbrance.
13. Invest in the securities of a foreign issuer if, at the time of
acquisition, more than 25% of the value of the Portfolio's total assets
would be invested in such securities.
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THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE COMSTOCK PORTFOLIO:
The Comstock Portfolio shall not:
1. With respect to 75% of its assets, invest more than 5% of its assets in the
securities of any one issuer (except the United States government) or
purchase more than 10% of the outstanding voting securities of any one
issuer, except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
2. Make short sales or purchase securities on margin; but it may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities, and it may engage in transactions in options, futures
contracts and related options and make margin deposits and payments in
connection therewith.
3. Pledge any of its assets, except that the Portfolio may pledge assets
having a value of not more than 10% of its total assets in order to secure
permitted borrowings from banks. Such borrowings may not exceed 5% of the
value of the Portfolio's assets and can be made only as a temporary measure
for extraordinary or emergency purposes. Notwithstanding the foregoing, the
Portfolio may engage in transactions in options, futures contracts and
related options, segregate or deposit assets to cover or secure options
written, and make margin deposits and payments for futures contracts and
related options.
4. Invest in securities issued by other investment companies, except part of a
merger, reorganization or other acquisition and except to the extent
permitted by (i) 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time
to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
5. Invest in real estate, commodities or commodities contracts, except
that the Portfolio may engage in transactions in futures contracts and
related options.
6. Invest in securities of a company for the purpose of exercising
management or control, although the Portfolio retains the right to vote
securities held by it, except that the Portfolio may purchase
securities of other investment companies to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions
of the 1940 Act.
7. Engage in the underwriting of securities of other issuers, except that the
Portfolio may sell an investment position even though it may be deemed to
be an underwriter as that term is defined under the Securities Act of 1933.
8. Purchase a restricted security or a security for which market
quotations are not readily available if as a result of such purchase
more than 5% of the Portfolio's assets would be invested in such
securities, except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
9. Invest more than 25% of its total net asset value in any one industry,
except that the Portfolio may purchase securities of other investment
companies to the extent permitted by (i) the 1940 Act, as amended from time
to time, (ii) the rules and regulations promulgated by the SEC under the
1940 Act, as amended from time to time, or (iii) an exemption or other
relief from the provisions of the 1940 Act.
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10. Make loans except by the purchase of bonds or other debt obligations of
types commonly offered publicly or privately and purchased by financial
institutions, including investment in repurchase agreements, provided that
the Portfolio will not make any investment in repurchase agreements
maturing in more than seven days if such investments, together with any
illiquid securities held by the Portfolio, would exceed 10% of the value
of its net assets.
In addition to the foregoing fundamental policies which may not be changed
without shareholder approval, the Comstock Portfolio is subject to the following
policies which may be amended by the Trustees. The Portfolio shall not:
1. Invest in the securities of a foreign issuer if, at the time of
acquisition, more than 15% of the value of the Portfolio's total assets
would be invested in securities of foreign issuers.
2. Invest more than 5% of its net assets in warrants or rights valued at the
lower of cost or market, nor more than 2% of its net assets in warrants or
rights (valued on such basis) which are not listed on the New York Stock
Exchange or American Stock Exchange. Warrants or rights acquired in units
or attached to other securities are not subject to the foregoing
limitations.
3. Invest in interests in oil, gas, or other mineral exploration or
development programs.
4. Invest more than 5% of its assets in companies having a record,
together with predecessors, of less than three years continuous
operation and in securities not having readily available market
quotations, except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii)
an exemption or other relief from the provisions of the 1940 Act.
5. Purchase or retain securities of any issuer if those officers and trustees
of the Portfolio or its investment adviser who own individually more than
1/2 of 1% of the securities of such issuer together own more than 5% of
the securities of such issuer.
6. Invest more than 5% of its assets in the securities of any one issuer
other than the United States government, except that the Portfolio may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
7. Pledge, mortgage or hypothecate its portfolio securities to the extent
that at any time the percentage of pledged securities plus the sales load
will exceed 10% of the offering price of the Fund's shares.
Notwithstanding the foregoing, the Fund may engage in transactions in
options, futures contracts and related options, segregate or deposit
assets to cover or secure options written, and make margin deposits or
payments for futures contracts and related options.
8. Invest more than 10% of its net assets (determined at the time of
investment) in illiquid securities and repurchase agreements that have
a maturity of longer than seven days.
THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE EMERGING GROWTH PORTFOLIO:
The Emerging Growth Portfolio shall not:
1. Invest directly in real estate interests of any nature, although the
Portfolio may invest indirectly through media such as real estate
investment trusts.
2. Invest in commodities or commodity contracts, except that the Portfolio
may enter into transactions in futures contracts or related options.
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3. Issue any of its securities for (a) services or (b) property other than
cash or securities (including securities of which the Portfolio is the
issuer), except as a dividend or distribution to its shareholders in
connection with a reorganization.
4. Issue senior securities and shall not borrow money except from banks as
a temporary measure for extraordinary or emergency purposes and in an
amount not exceeding five percent of the Portfolio's total assets.
Notwithstanding the foregoing, the Portfolio may enter into transactions
in options, futures contracts and related options and may make margin
deposits and payments in connection therewith.
5. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United
States government, its agencies or instrumentalities and repurchase
agreements secured hereby); provided, however, that this limitation
excludes shares of other open-end investment companies owned by the
Portfolio but includes the Portfolio's pro rata portion of the
securities and other assets owned by any such investment company.
6. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
7. Sell short or borrow for short sales. Short sales "against the box" are
not subject to this limitation.
8. With respect to 75% of its assets, invest more than 5% of its assets in
the securities of any one issuer (except obligations of the United
States government, it agencies or instrumentalities and repurchase
agreements secured thereby) or purchase more than 10% of the outstanding
voting securities of any one issuer except that the Portfolio may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
9. Invest in warrants in excess of 5% of its net assets (including, but not
to exceed 2% in warrants which are not listed on the New York or
American Stock Exchanges).
10. Purchase securities of issuers which have a record of less than three
years continuous operation if such purchase would cause more than 5% of
the Portfolio's total assets to be invested in securities of such
issuers except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii)
an exemption or other relief from the provisions of the 1940 Act.
11. Invest more than 15% of its net assets in illiquid securities, including
securities that are not readily marketable, restricted securities and
repurchase agreements that have a maturity of more than seven days except
that the Portfolio may purchase securities of other investment companies
to the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
12. Invest in interests in oil, gas, or other mineral exploration or
developmental programs, except through the purchase of liquid securities
of companies which engage in such businesses.
13. Pledge, mortgage or hypothecate its portfolio securities or other
assets to the extent that the percentage of pledged assets plus the
sales load exceeds 10% of the offering price of the Portfolio's shares.
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379
THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE GLOBAL EQUITY PORTFOLIO:
The Global Equity Portfolio shall not:
1. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United
States government, its agencies or instrumentalities and repurchase
agreements secured thereby); provided, however, that this limitation
excludes shares of other open-end investment companies owned by the
Portfolio but includes the Portfolio's pro rata portion of the
securities and other assets owned by any such investment company.
2. With respect to 75% of its assets, invest more than 5% of its assets in
the securities of any one issuer (except obligations of the United
States government, its agencies or instrumentalities and repurchase
agreements secured thereby) or purchase more than 10% of the outstanding
voting securities of any one issuer, except that the Portfolio may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
3. Borrow money except temporarily from banks to facilitate payment of
redemption requests and then only in amounts not exceeding 33 1/3% of its
net assets, or pledge more than 10% of its net assets in connection with
permissible borrowings or purchase additional securities when money
borrowed exceeds 5% of its net assets. Margin deposits or payments in
connection with the writing of options or in connection with the purchase
or sale of forward contracts, futures, foreign currency futures and related
options are not deemed to be a pledge or other encumbrance.
4. Lend money except through the purchase of (i) United States and foreign
government securities, commercial paper, bankers' acceptances,
certificates of deposit similar evidences of indebtedness, both foreign
and domestic, and (ii) repurchase agreements; or lend securities in an
amount exceeding 15% of the total assets of the Portfolio. The purchase
of a portion of an issue of securities described under (i) above
distributed publicly, whether or not the purchase is made on the
original issuance, is not considered the making of a loan.
5. Make short sales of securities, unless at the time of the sale it owns
or has the right to acquire an equal amount of such securities; provided
that this prohibition does not apply to the writing of options or the
sale of forward contracts, futures, foreign currency futures or related
options.
6. Purchase securities on margin but the Portfolio may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. The deposit or payment by the Portfolio of
initial or maintenance margin in connection with forward contracts,
futures, foreign currency futures or related options is not considered
the purchase of a security on margin.
7. Buy or sell real estate or interests in real estate including real
estate limited partnerships, provided that the foregoing prohibition
does not apply to a purchase and sale of publicly traded (i) securities
which are secured by real estate, (ii) securities representing interests
in real estate, and (iii) securities of companies principally engaged in
investing or dealing in real estate.
8. Invest in commodities or commodity contracts, except that the Portfolio
may enter into transactions in options, futures contracts or related
options including foreign currency futures contracts and related options
and forward contracts.
9. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i)
making and collateralizing any permitted borrowings, (ii) making any
permitted loans of its portfolio securities or (iii) entering into
repurchase agreements, utilizing options, futures contracts, options on
futures contracts, forward contracts, forward commitments and other
investment strategies and instruments that would be considered "senior
securities" but for the
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maintenance by the Portfolio of a segregated account with its custodian
or some other form of "cover".
10. Invest in the securities of other open-end investment companies, or
invest in the securities of closed-end investment companies except (a)
through purchase in the open market in a transaction involving no
commission or profit to a sponsor or dealer (other than the customary
broker's commission) or as part of a merger, consolidation or other
acquisition; or (b) to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii)
an exemption or other relief from the provisions of the 1940 Act.
11. Invest more than 5% of its net assets in warrants or rights valued at
the lower of cost or market, nor more than 2% of its net assets in
warrants or rights (valued on such basis) which are not listed on the
New York or American Stock Exchanges. Warrants or rights acquired in
units or attached to other securities are not subject to the foregoing
limitation.
12. Invest in interests in oil, gas, or other mineral exploration or
development programs or invest in oil, gas, or mineral leases, except
that the Portfolio may acquire securities of public companies which
themselves are engaged in such activities.
13. Invest more than 5% of its total assets in securities of unseasoned
issuers which have been in operation directly or through predecessors
for less than three years, except that the Portfolio may purchase
securities of other investment companies to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions
of the 1940 Act.
14. Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets (taken at current value) would be invested in
securities that are illiquid by virtue of the absence of a readily
available market. This policy includes repurchase agreements maturing
in more than seven days and over-the-counter options held by the
Portfolio and that portion of assets used to cover such options. This
policy does not apply to restricted securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 which the
Trustees or the Adviser under Board approved guidelines, may determine
are liquid nor does it apply to other securities, for which,
notwithstanding legal or contractual restrictions on resale, a liquid
market exists. Notwithstanding the foregoing, this limitation excludes
shares of other open-end investment companies owned by the Portfolio
but includes the Portfolio's pro rata portion of the securities and
other assets owned by any such investment company.
THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE GOVERNMENT
PORTFOLIO:
The Government Portfolio shall not:
1. With respect to 75% of its assets, invest more than 5% of its assets in
the securities of any one issuer (except obligations of the United
States government, its agencies or instrumentalities and repurchase
agreements secured thereby) or purchase more than 10% of the outstanding
voting securities of any one issuer, except that the Portfolio may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
2. Invest in securities issued by other investment companies except as
part of a merger, reorganization or other acquisition and except to the
extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940
Act, as amended from time to time, or (iii) an exemption or other
relief from the provisions of the 1940 Act.
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3. Make any investment in real estate, commodities or commodities contracts,
except that the Portfolio may invest in interest rate futures and related
options and may purchase securities secured by real estate or interests
therein; or issued by companies, including real estate investment trusts,
which invest in real estate or interests therein.
4. Invest in interests in oil, gas, or other mineral exploration or
development programs.
5. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than 5% of
the Portfolio's assets would be invested in such securities except that
the Fund may purchase securities of other investment companies to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
6. Lend money, except that the Portfolio may invest in repurchase agreements
in accordance with applicable requirements set forth in the Prospectus and
may acquire debt securities which the Portfolio's investment policies
permit. The Portfolio will not invest in repurchase agreements maturing in
more than seven days (unless subject to a demand feature) if any such
investment, together with any illiquid securities (including securities
which are subject to legal or contractual restrictions on resale) held by
the Portfolio, exceeds ten percent of the market or other fair value of
its total net assets. See "Repurchase Agreements" in the Prospectus and
herein.
7. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United
States government, its agencies or instrumentalities and repurchase
agreements secured thereby).
8. Make short sales of securities, unless at the time of the sale the
Portfolio owns or has the right to acquire an equal amount of such
securities. Notwithstanding the foregoing, the Portfolio may make short
sales by entering into forward commitments for hedging or cross-hedging
purposes and the Portfolio may engage in transactions in options, future
contracts and related options.
9. Purchase securities on margin, except that the Portfolio may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities. The deposit or payment by the Portfolio of initial or
maintenance margin in connection with interest rate futures contracts or
related options transactions is not considered the purchase of a security
on margin.
10. Invest more than 5% of its assets in companies having a record, together
with predecessors, of less than three years continuous operation except
that the Portfolio may purchase securities of other investment companies
to the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
11. Borrow in excess of 10% of the market or other fair value of its total
assets, or pledge its assets to an extent greater than 5% of the market or
other fair value of its total assets. Any such borrowings shall be from
banks and shall be undertaken only as a temporary measure for
extraordinary or emergency purposes. Deposits in escrow in connection with
the writing of options, or in connection with the purchase or sale of
futures contracts and related options are not deemed to be a pledge or
other encumbrance.
12. Write, purchase or sell puts, calls or combinations thereof, except that
the Portfolio may (a) write covered or fully collateralized call options,
write secured put options, and enter into closing or offsetting purchase
transactions with respect to such options, (b) purchase options to the
extent that the premiums paid for all such options owned at any time do
not exceed 10% of its total assets, and enter into closing or offsetting
transactions with respect to such options, and (c) engage in transactions
in interest rate futures contracts and related options provided that such
transactions are entered into for bona fide hedging purposes (or that the
underlying commodity value of the
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Portfolio's long positions do not exceed the sum of certain identified
liquid investments as specified in CFTC regulations), provided further that
the aggregate initial margin and premiums do not exceed 5% of the fair
market value of the Portfolio's total assets, and provided further that the
Portfolio may not purchase futures contracts or related options if more
than 30% of the Portfolio's total assets would be so invested.
THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE GROWTH AND INCOME
PORTFOLIO:
The Growth and Income Portfolio shall not:
1. Borrow money, except from a bank and then only as a temporary measure
for extraordinary or emergency purposes but not for making additional
investments and not in excess of 5% of the total net assets of the
Portfolio taken at cost. In connection with any borrowing the Portfolio
may pledge up to 15% of its total assets taken at cost. Notwithstanding
the foregoing, the Portfolio may engage in transactions in options,
futures contracts and related options, segregate or deposit assets to
cover or secure options written, and make margin deposits or payments
for futures contracts and related options.
2. Purchase or sell interests in real estate, except readily marketable
securities, including securities of real estate investment trusts.
3. Purchase or sell commodities or commodities contracts, except that the
Portfolio may enter into transactions in futures contracts and related
options.
4. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i)
making and collateralizing any permitted borrowings, (ii) making any
permitted loans of its portfolio securities, or (iii) entering into
repurchase agreements, utilizing options, futures contracts, options on
futures contracts and other investment strategies and instruments that
would be considered "senior securities" but for the maintenance by the
Portfolio of a segregated account with its custodian or some other form
of "cover."
5. Invest more than 25% of its total net asset value in any one industry
provided, however, that this limitation excludes shares of other
open-end investment companies owned by the Portfolio but includes the
Portfolio's pro rata portion of the securities and other assets owned by
any such company.
6. Invest more than 5% of the market value of its total assets at the time
of purchase in the securities (except U.S. government securities) of any
one issuer or purchase more than 10% of the outstanding voting
securities of such issuer except that the Portfolio may purchase
securities of other investment companies to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions
of the 1940 Act.
In addition to the foregoing fundamental policies which may not be changed
without shareholder approval, the Growth and Income Portfolio is subject to the
following policies which may be amended by the Trustees.
1. Purchase securities on margin, or sell securities short, but the
Portfolio may enter into transactions in options, futures contracts and
related options and may make margin deposits and payments in connection
therewith.
2. The Portfolio may not invest in interests in oil, gas, or other mineral
exploration or development programs, except that the Portfolio may
acquire securities of public companies which themselves are engaged in
such activities.
3. Purchase securities of a corporation in which a trustee of the Portfolio
owns a controlling interest.
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4. Permit officers or trustees of the Portfolio to profit by selling
securities to or buying them from the Portfolio. However, companies with
which the officers and trustees of the Portfolio are connected may enter
into underwriting agreements with the Portfolio to sell its shares, sell
securities to, and purchase securities from the Portfolio when acting as
broker or dealer at the customary and usual rates and discounts, to the
extent permitted by the 1940 Act.
5. Investments in repurchase agreements and purchases by the Portfolio of a
portion of an issue of publicly distributed debt securities shall not be
considered the making of a loan.
6. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than 15% of
the value of the Portfolio's net assets would be invested in such
securities except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
7. Invest more than 5% of the market value of its total assets in companies
having a record together with predecessors of less than three years
continuous operation and in securities not having readily available
market quotations except that the Portfolio may purchase securities of
other investment companies to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE MONEY MARKET
PORTFOLIO:
The Money Market Portfolio shall not:
1. With respect to 75% of its assets, invest more than 5% of its assets in the
securities of any one issuer (except obligations of the United States
government, its agencies or instrumentalities and repurchase agreements
secured thereby) or purchase more than 10% of the outstanding voting
securities of any one issuer except that the Fund may purchase securities
of other investment companies to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
2. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
3. Make any investment in real estate, commodities or commodities contracts,
except that the Portfolio may purchase securities secured by real estate or
interests therein; or issued by companies, including real estate investment
trusts, which invest in real estate or interests therein.
4. Invest in interests in oil, gas, or other mineral exploration or
development programs.
5. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than 5%
of the Portfolio's assets would be invested in such securities except
that the Fund may purchase securities of other investment companies to
the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940
Act, as amended from time to time, or (iii) an exemption or other relief
from the provisions of the 1940 Act.
6. Lend money, except that the Portfolio may invest in repurchase agreements
in accordance with applicable requirements set forth in the Prospectus and
may acquire debt securities which the Portfolio's investment policies
permit. The Portfolio will not invest in repurchase agreements
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384
maturing in more than seven days (unless subject to a demand feature) if
any such investment, together with any illiquid securities (including
securities which are subject to legal or contractual restrictions on
resale) held by the Portfolio, exceeds 10% of the market or other fair
value of its total net assets. See "Repurchase Agreements" in the
Prospectus and herein.
7. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United
States government, its agencies or instrumentalities and repurchase
agreements secured thereby and obligations of domestic branches of United
States banks).
8. Make short sales of securities, unless at the time of the sale the
Portfolio owns or has the right to acquire an equal amount of such
securities.
9. Purchase securities on margin, except that the Portfolio may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of securities.
10. Invest more than 5% of its assets in companies having a record, together
with predecessors, of less than three years continuous operation except
that the Fund may purchase securities of other investment companies to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
11. Write put or call options.
12. Borrow in excess of 10% of the market or other fair value of its total
assets, or pledge its assets to an extent greater than 5% of the market or
other fair value of its total assets. Any such borrowings shall be from
banks and shall be undertaken only as a temporary measure for
extraordinary or emergency purposes. Deposits in escrow in connection with
the writing of covered call or secured put options, or in connection with
the purchase or sale of futures contracts and related options are not
deemed or to be a pledge or other encumbrance.
13. Purchase any security which matures more than one year from the date of
purchase.
THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE MORGAN STANLEY REAL ESTATE
SECURITIES PORTFOLIO.
The Morgan Stanley Real Estate Securities Portfolio shall not:
1. Engage in the underwriting of securities of other issuers, except that
the Portfolio may sell an investment position even though it may be
deemed to be an underwriter under the federal securities laws.
2. With respect to 75% of its total assets, invest more than 5% of its
assets in the securities of any one issuer (except the U.S. government,
its agencies and instrumentalities and repurchase agreements secured
thereby) or purchase more than 10% of the outstanding voting securities
of any one issuer, except that the Portfolio may purchase securities of
other investment companies to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
3. Borrow money except temporarily from banks to facilitate payment of
redemption requests and then only in amounts not exceeding 33 1/3% of
its net assets, or pledge more than 10% of its net assets in connection
with permissible borrowings or purchase additional securities when money
borrowed exceeds 5% of its net assets. Margin deposits or payments in
connection with the writing of options, or in connection with the
purchase or sale of forward contracts, futures, foreign currency futures
and related options, are not deemed to be a pledge or other encumbrance.
4. Lend money or securities except by the purchase of a portion of an
issue of bonds, debentures or other obligations of types commonly
distributed to institutional investors publicly or privately (in the
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385
latter case the investment will be subject to the stated limits on
investments in "restricted securities"), and except by the purchase of
securities subject to repurchase agreements.
5. Buy or sell real estate including real estate limited partnerships,
provided that the foregoing prohibition does not apply to a purchase and
sale of (i) securities which are secured by real estate, (ii) securities
representing interests in real estate, and (iii) securities of companies
operating in the real estate industry, including real estate investment
trusts. The Portfolio may hold and sell real estate acquired as a result
of the ownership of its securities.
6. Invest in commodities or commodity contracts, except that the Portfolio
may enter into transactions in options, futures contracts or related
options including foreign currency futures contracts and related
options and forward contracts.
7. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i) making
and collateralizing any permitted borrowings, (ii) making any permitted
loans of its portfolio securities or (iii) entering into repurchase
agreements, utilizing options, futures contracts, options on futures
contracts, forward contracts, forward commitments and other investment
strategies and instruments that would be considered "senior securities"
but for the maintenance by the Portfolio of a segregated account with its
custodian or some other form of "cover".
8. Concentrate its investment in any one industry, except that the Portfolio
will invest more than 25% of its total assets in the real estate industry.
This limitation excludes shares of other open-end investment companies
owned by the Portfolio but includes the Portfolio's pro rata portion of
the securities and other assets owned by any such company.
9. Write, purchase or sell puts, calls or combinations thereof, except that
the Portfolio may (a) write covered or fully collateralized call options,
write secured put options, and enter into closing or offsetting purchase
transactions with respect to such options, (b) purchase and sell options
to the extent that the premiums paid for all such options owned at any
time do not exceed 10% of its total assets and (c) engage in transactions
in futures contracts and related options transactions provided that such
transactions are entered into for bona fide hedging purposes (or meet
certain conditions as specified in CFTC regulations), and provided further
that the aggregate initial margin and premiums do not exceed 5% of the
fair market value of the Portfolio's total assets.
10. The Portfolio may not make short sales of securities, unless at the
time of the sale it owns or has the right to acquire an equal amount of
such securities; provided that this prohibition does not apply to the
writing of options or the sale of forward contracts, futures, foreign
currency futures or related options.
In addition to the foregoing fundamental policies which may not be changed
without shareholder approval, the Morgan Stanley Real Estate Securities
Portfolio is subject to the following policies which may be amended by the
Morgan Stanley Real Estate Securities Portfolio's Trustees and which apply at
the time of purchase of portfolio securities.
1. The Portfolio may not make investments for the purpose of exercising
control or management although the Portfolio retains the right to vote
securities held by it except that the Portfolio may purchase securities
of other investment companies to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time,
or (iii) an exemption or other relief from the provisions of the 1940
Act.
2. The Portfolio may not purchase securities on margin but the Portfolio
may obtain such short-term credits as may be necessary for the clearance
of purchases and sales of securities. The deposit or payment by the
Portfolio of initial or maintenance margin in connection with forward
contracts, futures, foreign currency futures or related options is not
considered the purchase of a security on margin.
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386
3. The Portfolio may not invest in the securities of other open-end investment
companies, or invest in the securities of closed-end investment companies
except through purchase in the open market in a transaction involving no
commission or profit to a sponsor or dealer (other than the customary
broker's commission) or as part of a merger, consolidation or other
acquisition except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
4. The Portfolio may not invest more than 5% of its net assets in warrants or
rights valued at the lower of cost or market, nor more than 2% of its net
assets in warrants or rights (valued on such basis) which are not listed on
the New York or American Stock Exchanges. Warrants or rights acquired in
units or attached to other securities are not subject to the foregoing
limitation.
5. The Portfolio may not invest in securities of any company if any officer
or trustee of the Portfolio or of the Adviser owns more than 1/2 of 1%
of the outstanding securities of such company, and such officers and
trustees who own more than 1/2 of 1% own in the aggregate more than 5%
of the outstanding securities of such issuer.
6. The Portfolio may not invest in interests in oil, gas, or other mineral
exploration or development programs or invest in oil, gas, or mineral
leases, except that the Portfolio may acquire securities of public
companies which themselves are engaged in such activities.
7. The Portfolio may not invest more than 5% of its total assets in securities
of unseasoned issuers which have been in operation directly or through
predecessors for less than three years, except that the Portfolio may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time
to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
8. The Portfolio may not purchase or otherwise acquire any security if, as
a result, more than 15% of its net assets (taken at current value) would
be invested in securities that are illiquid by virtue of the absence of
a readily available market. This policy does not apply to restricted
securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 which the Trustees or the Adviser under approved
guidelines, may determine are liquid nor does it apply to other
securities for which, notwithstanding legal or contractual restrictions
on resale, a liquid market exists.
THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE STRATEGIC STOCK PORTFOLIO.
The Strategic Stock Portfolio shall not:
1. Engage in the underwriting of securities of other issuers, except that
the Portfolio may sell an investment position even though it may be
deemed to be an underwriter under the federal securities laws.
2. Purchase any securities (other than obligations issued or guaranteed by the
United States government or by its instrumentalities), if, as a result,
more than 5% of the Portfolio's total assets (taken at current value) would
then be invested in securities of a single issuer or, if as a result, such
Portfolio would hold more than 10% of the outstanding voting securities of
an issuer, except that up to 25% of the Portfolio's total assets may be
invested without regard to such limitations. Neither limitation shall apply
to the acquisition of shares of other open-end investment companies to the
extent permitted by rule or order of the SEC exempting the Portfolio from
the limitations imposed by Section 12(d)(1) of the 1940 Act.
3. Invest more than 25% of its assets in a single industry, provided, however,
that this limitation excludes shares of other open-end investment companies
owned by the Portfolio but includes the
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Portfolio's pro rata portion of the securities and other assets owned by
any such company. (Neither the U.S. government nor any of its agencies
or instrumentalities will be considered an industry for purposes of this
restriction.)
4. Buy or sell real estate including real estate limited partnerships,
provided that the foregoing prohibition does not apply to a purchase and
sale of (i) securities which are secured by real estate, (ii) securities
representing interests in real estate, and (iii) securities of companies
operating in the real estate industry, including real estate investment
trusts. The Portfolio may hold and sell real estate acquired as a result
of the ownership of its securities.
5. Invest in commodities or commodity contracts, except that the Portfolio
may enter into transactions in options, futures contracts or related
options including foreign currency futures contracts and related options
and forward contracts.
6. Issue senior securities, borrow money from banks or enter into reverse
repurchase agreements with banks in the aggregate in excess of 33 1/3% of
the Portfolio's total assets (after giving effect to any such borrowing);
which amount does not include borrowings and reverse repurchase agreements
with any entity where such borrowings and reverse repurchase agreements are
in an amount not exceeding 5% of its total assets and for temporary
purposes only. The Portfolio will not mortgage, pledge or hypothecate any
assets other than in connection with issuances of senior securities,
borrowings, delayed delivery, and when issued transactions, options,
futures contracts, options on futures contracts, forward contracts, forward
commitments and other investment strategies and instruments.
7. Make loans of money or property to any person, except (i) to the extent
the securities in which the Portfolio may invest are considered to be
loans, (ii) through the loan of portfolio securities, and (iii) to the
extent that the Portfolio may lend money or property in connection with
maintenance of the value of, or the Portfolio's interest with respect
to, the securities owned by the Portfolio.
In addition to the foregoing fundamental policies which may not be changed
without shareholder approval, the Strategic Stock Portfolio is subject to the
following policies which may be amended by the Strategic Stock Portfolio's
Trustees and which apply at the time of purchase of portfolio securities.
1. The Portfolio may not make short sales of securities, unless at the time
of the sale it owns or has the right to acquire an equal amount of such
securities; provided that this prohibition does not apply to the writing
of options or the sale of forward contracts, futures, foreign currency
futures or related options.
2. The Portfolio may not make investments for the purpose of exercising
control or management although the Portfolio retains the right to vote
securities held by it except that the Portfolio may purchase securities
of other investment companies to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time,
or (iii) an exemption or other relief from the provisions of the 1940
Act.
3. The Portfolio may not purchase securities on margin but the Portfolio
may obtain such short-term credits as may be necessary for the clearance
of purchases and sales of securities. The deposit or payment by the
Portfolio of initial or maintenance margin in connection with forward
contracts, futures, foreign currency futures or related options is not
considered the purchase of a security on margin.
4. The Portfolio may not invest in the securities of other open-end investment
companies, or invest in the securities of closed-end investment companies
except as part of a merger, consolidation or other acquisition and except
that the Portfolio may purchase securities of other investment companies to
the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
5. The Portfolio may not invest more than 5% of its net assets in warrants
or rights valued at the lower of cost or market, nor more than 2% of its
net assets in warrants or rights (valued on such basis)
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which are not listed on the New York or American Stock Exchanges.
Warrants or rights acquired in units or attached to other securities are
not subject to the foregoing limitation.
6. The Portfolio may not invest in securities of any company if any officer or
trustee of the Portfolio or of the Adviser owns more than 1/2 of 1% of the
outstanding securities of such company, and such officers and trustees who
own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer.
7. The Portfolio may not invest in interests in oil, gas, or other mineral
exploration or development programs or invest in oil, gas, or mineral
leases, except that the Portfolio may acquire securities of public
companies which themselves are engaged in such activities.
8. The Portfolio may not invest more than 5% of its total assets in
securities of unseasoned issuers which have been in operation directly
or through predecessors for less than three years, except that the
Portfolio may purchase securities of other investment companies to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
9. The Portfolio may not purchase or otherwise acquire any security if, as
a result, more than 15% of its net assets (taken at current value) would
be invested in securities that are illiquid by virtue of the absence of
a readily available market. This policy does not apply to restricted
securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 which the Trustees or the Adviser under approved
guidelines, may determine are liquid nor does it apply to other
securities for which, notwithstanding legal or contractual restrictions
on resale, a liquid market exists.
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Trust's Board of Trustees and each Portfolio's officers appointed by the Board
of Trustees. The tables below list the trustees and officers of the Trust and
executive officers of each Portfolio's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with Van
Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment
Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Management
Inc., Van Kampen Advisors Inc., Van Kampen Insurance Agency of Illinois Inc.,
Van Kampen Insurance Agency of Texas Inc., Van Kampen System Inc., Van Kampen
Recordkeeping Services Inc., American Capital Contractual Services, Inc., Van
Kampen Trust Company, Van Kampen Exchange Corp. and Van Kampen Investor Services
Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers". For purposes hereof, the term
"Fund Complex" includes each of the open-end investment companies advised by the
Advisers (excluding Van Kampen Exchange Fund).
TRUSTEES
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
J. Miles Branagan......................... Private investor. Trustee/Director
1632 Morning Mountain Road of each of the funds in the Fund
Raleigh, NC 27614 Complex. Co-founder, and prior to
Date of Birth: 07/14/32 August 1996, Chairman, Chief
Age: 67 Executive Officer and President,
MDT Corporation (now known as
Getinge/Castle, Inc., a subsidiary
of Getinge Industrier AB), a company
which develops, manufactures,
markets and services medical and
scientific equipment.
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PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
Jerry D. Choate........................... Director of Amgen Inc., a
53 Monarch Bay Drive biotechnological company.
Dana Point, CA 92629 Trustee/Director of each of the
Date of Birth: 09/16/38 funds in the Fund Complex. Prior
Age: 61 to January 1999, Chairman and Chief
Executive Officer of The Allstate
Corporation ("Allstate") and
Allstate Insurance Company. Prior to
January 1995, President and Chief
Executive Officer of Allstate. Prior
to August 1994, various management
positions at Allstate.
Linda Hutton Heagy........................ Managing Partner of Heidrick &
Sears Tower Stuggles, an executive search firm.
233 South Wacker Drive Trustee/Director of each of the
Suite 7000 funds in the Fund Complex. Prior to
Chicago, IL 60606 1997, Partner Ray & Berndtson Inc.,
Date of Birth: 06/03/48 an executive recruiting and
Age: 51 management consulting firm.
Formerly, Executive Vice President
of ABN AMRO, N.A., a Dutch bank
holding company. Prior to 1992,
Executive Vice President of La
Salle National Bank. Trustee on the
University of Chicago Hospitals
Board, Vice Chair of the Board of
The YMCA of Metropolitan Chicago
and a member of the Women's Board
of the University of Chicago. Prior
to 1996, Trustee of The
International House Board, a
fellowship and housing organization
for international graduate
students.
R. Craig Kennedy.......................... President and Director, German
11 DuPont Circle, N.W. Marshall Fund of the United States,
Washington, D.C. 20016 an independent U.S. foundation
Date of Birth: 02/29/52 created to deepen understanding,
Age: 48 promote collaboration and stimulate
exchanges of practical experience
between Americans and Europeans.
Trustee/Director of each of the
funds in the Fund Complex. Formerly,
advisor to the Dennis Trading Group
Inc., a managed futures and option
company that invests money for
individuals and institutions. Prior
to 1992, President and Chief
Executive Officer, Director and
Member of the Investment Committee
of the Joyce Foundation, a private
foundation.
Mitchell M. Merin*........................ President and Chief Operating
Two World Trade Center Officer of Asset Management
66th Floor of Morgan Stanley Dean Witter since
New York, NY 10048 December 1998. President and
Date of Birth: 08/13/53 Director since April 1997 and Chief
Age 46 Executive Officer since June 1998 of
Morgan Stanley Dean Witter Advisors
Inc. and Morgan Stanley Dean Witter
Services Company Inc. Chairman,
Chief Executive Officer and Director
of Morgan Stanley Dean Witter
Distributors Inc. since June 1998.
Chairman and Chief Executive Officer
since June 1998, and Director since
January 1998, of Morgan Stanley Dean
Witter Trust FSB. Director of
various Morgan Stanley Dean Witter
subsidiaries. President of the
Morgan Stanley Dean Witter Funds and
Discover Brokerage Index Series
since May 1999. Trustee/Director of
each of the funds in the Fund
Complex. Previously Chief Strategic
Officer of Morgan Stanley Dean
Witter Advisors Inc. and Morgan
Stanley Dean Witter Services Company
Inc. and Executive Vice President of
Morgan Stanley Dean Witter
Distributors Inc. April 1997-June
1998, Vice President of the Morgan
Stanley Dean Witter Funds and
Discover Brokerage Index Series May
1997-April 1999, and Executive Vice
President of Dean Witter, Discover &
Co.
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PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
Jack E. Nelson............................ President and owner, Nelson
423 Country Club Drive Investment Planning Services, Inc.,
Winter Park, FL 32789 a financial planning company and
Date of Birth: 02/13/36 registered investment adviser in
Age: 64 the State of Florida. President and
owner, Nelson Ivest Brokerage
Services Inc., a member of the
National Association of Securities
Dealers, Inc. and Securities
Investors Protection Corp.
Trustee/Director of each of the
funds in the Fund Complex.
Richard F. Powers, III*................... Chairman, President and Chief
1 Parkview Plaza Executive Officer of Van Kampen
P.O. Box 5555 Investments. Chairman, Director and
Oakbrook Terrace, IL 60181-5555 Chief Date of Birth: 02/02/46
Age: 54 Executive Officer of the Advisers,
the Distributor, Van Kampen Advisors
Inc. and Van Kampen Management Inc.
Director and officer of certain
other subsidiaries of Van Kampen
Investments. Trustee/Director and
President of each of the funds in
the Fund Complex. Trustee, President
and Chairman of the Board of other
investment companies advised by the
Advisers and their affiliates, and
Chief Executive Officer of Van
Kampen Exchange Fund. Prior to May
1998, Executive Vice President and
Director of Marketing at Morgan
Stanley Dean Witter and Director of
Dean Witter Discover & Co. and Dean
Witter Realty. Prior to 1996,
Director of Dean Witter Reynolds
Inc.
Phillip B. Rooney......................... Vice Chairman (since April 1997) and
One ServiceMaster Way Director (since 1994) of The
Downers Grove, IL 60515 ServiceMaster Company, a business
Date of Birth: 07/08/44 and consumer services company.
Age: 55 Director of Illinois Tool Works,
Inc., a manufacturing company and
the Urban Shopping Centers Inc., a
retail mall management company.
Trustee, University of Notre Dame.
Trustee/Director of each of the
funds in the Fund Complex. Prior to
1998, Director of Stone Smurfit
Container Corp., a paper
manufacturing company. From May 1996
through February 1997 he was
President, Chief Executive Officer
and Chief Operating Officer of Waste
Management, Inc., an environmental
services company, and from November
1984 through May 1996 he was
President and Chief Operating
Officer of Waste Management, Inc.
Fernando Sisto............................ Professor Emeritus. Prior to August
155 Hickory Lane 1996, a George M. Bond Chaired
Closter, NJ 07624 Professor with Stevens Institute of
Date of Birth: 08/02/24 Technology, and prior to 1995, Dean
Age: 75 of the Graduate School, Stevens
Institute of Technology. Director,
Dynalysis of Princeton, a firm
engaged in engineering research.
Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden,
333 West Wacker Drive Arps, Slate, Meagher & Flom
Chicago, IL 60606 (Illinois), legal counsel to the
Date of Birth: 08/22/39 funds in the Fund Complex, and other
Age: 60 investment companies advised by the
Advisers or Van Kampen Management
Inc. Trustee/Director of each of the
funds in the Fund Complex, and
Trustee/Managing General Partner of
other investment companies advised
by the Advisers or Van Kampen
Management Inc.
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PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
Suzanne H. Woolsey........................ Chief Operating Officer of the
2101 Constitution Ave., N.W. National Academy of Sciences/
Room 206 National Research Council, an
Washington, D.C. 20418 independent, federally chartered
Date of Birth: 12/27/41 policy institution, since 1993.
Age: 58 Director of Neurogen Corporation, a
pharmaceutical company, since
January 1998. Director of the German
Marshall Fund of the United States,
Trustee of Colorado College, and
Vice Chair of the Board of the
Council for Excellence in
Government. Trustee/Director of each
of the funds in the Fund Complex.
Prior to 1993, Executive Director of
the Commission on Behavioral and
Social Sciences and Education at the
National Academy of
Sciences/National Research Council.
From 1980 through 1989, Partner of
Coopers & Lybrand.
- ------------------------------------
* Such trustee is an "interested person" (within the meaning of Section
2(a)(19) of the 1940 Act). Mr. Whalen is an interested person of the Fund by
reason of his firm currently acting as legal counsel to the Fund. Messrs.
Merin and Powers are interested persons of the Fund and the Advisers by
reason of their positions with Morgan Stanley Dean Witter or its affiliates.
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OFFICERS
Messrs. Smith, Santo, Hegel, Sullivan, and Zimmermann are located at
1 Parkview Plaza, PO Box 5555, Oakbrook Terrace, IL 60181-5555. Mr. Boyd is
located at 2800 Post Oak Blvd., Houston, TX 77056.
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
A. Thomas Smith III...................... Executive Vice President, General
Date of Birth: 12/14/56 Counsel, Secretary and Director of
Vice President and Secretary Van Kampen Investments, the
Age: 43 Advisers, Van Kampen Advisors Inc.,
Van Kampen Management Inc., the
Distributor, American Capital
Contractual Services, Inc., Van
Kampen Exchange Corp., Van Kampen
Recordkeeping Services Inc.,
Investor Services, Van Kampen
Insurance Agency of Illinois Inc.
and Van Kampen System Inc. Vice
President and Secretary/Vice
President, Principal Legal Officer
and Secretary of other investment
companies advised by the Advisers or
their affiliates. Vice President and
Secretary of each of the funds in
the Fund Complex. Prior to January
1999, Vice President and Associate
General Counsel to New York Life
Insurance Company ("New York Life"),
and prior to March 1997, Associate
General Counsel of New York Life.
Prior to December 1993, Assistant
General Counsel of The Dreyfus
Corporation. Prior to August 1991,
Senior Associate, Willkie Farr &
Gallagher. Prior to January 1989,
Staff Attorney at the Securities and
Exchange Commission, Division of
Investment Management, Office of
Chief Counsel.
Michael H. Santo......................... Executive Vice President, Chief
Date of Birth: 10/22/55 Administrative Officer and Director
Vice President of Van Kampen Investments, the
Age: 44 Advisers, the Distributor, Van
Kampen Advisors Inc., Van Kampen
Management Inc. and Van Kampen
Investor Services Inc., and serves
as a Director or Officer of certain
other subsidiaries of Van Kampen
Investments. Vice President of each
of the funds in the Fund Complex and
certain other investment companies
advised by the Advisers and their
affiliates. Prior to 1998, Senior
Vice President and Senior Planning
Officer for Individual Asset
Management of Morgan Stanley Dean
Witter and its predecessor since
1994. From 1990-1994, First Vice
President and Assistant Controller
in Dean Witter's Controller's
Department.
Peter W. Hegel........................... Executive Vice President of the
Date of Birth: 06/25/56 Advisers, Van Kampen Management Inc.
Vice President and Van Kampen Advisors Inc. Vice
Age: 43 President of each of the funds in
the Fund Complex and certain other
investment companies advised by the
Advisers or their affiliates. Prior
to September 1996, Director of
McCarthy, Crisanti & Maffei, Inc, a
financial research company.
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NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
Stephen L. Boyd...................... Executive Vice President and Chief
Date of Birth: 11/16/40 Investment Officer of Van Kampen
Executive Vice President and Investments, and President and Chief
Chief Investment Officer Operating Officer of the Advisers.
Age: 59 Executive Vice President of each of
the funds in the Fund Complex and
certain other investment companies
advised by the Advisers or their
affiliates. Prior to April 2000,
Vice President and Chief Investment
Officer of the Advisers. Prior to
October 1998, Vice President and
Senior Portfolio Manager with AIM
Capital Management, Inc. Prior to
February 1998, Senior Vice President
and Portfolio Manager of Van Kampen
American Capital Asset Management,
Inc., Van Kampen American Capital
Investment Advisory Corp. and Van
Kampen American Capital Management,
Inc.
John L. Sullivan..................... Senior Vice President of Van Kampen
Date of Birth: 08/20/55 Investments and the Advisers. Vice
Vice President, Chief Financial President, Chief Financial Officer
Officer and Treasurer and Treasurer of each of the funds
Age: 44 in the Fund Complex and certain
other investment companies advised
by the Advisers or their affiliates.
John H. Zimmermann, III.............. Senior Vice President and Director
Date of Birth: 11/25/57 of Van Kampen Investments, President
Vice President and Director of the Distributor and
Age: 42 President of Van Kampen Insurance
Agency of Illinois Inc. Vice
President of each of the funds in
the Fund Complex. From November 1992
to December 1997, Mr. Zimmermann was
Senior Vice President of the
Distributor.
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 63 operating funds in the Fund Complex. Each trustee/director who is not an
affiliated person of Van Kampen Investments, the Advisers or the Distributor
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex provides a deferred compensation plan to its Non-Affiliated
Trustees that allows trustees/directors to defer receipt of their compensation
and earn a return on such deferred amounts. Deferring compensation has the
economic effect as if the Non-Affiliated Trustee reinvested his or her
compensation into the funds. Each fund in the Fund Complex provides a retirement
plan to its Non-Affiliated Trustees that provides Non-Affiliated Trustees with
compensation after retirement, provided that certain eligibility requirements
are met as more fully described below.
The compensation of each Non-Affiliated Trustee includes an annual retainer
in an amount equal to $50,000 per calendar year, due in four quarterly
installments on the first business day of each quarter. Payment of the annual
retainer is allocated among the funds in the Fund Complex on the basis of the
relative net assets of each fund as of the last business day of the preceding
calendar quarter. The compensation of each Non-Affiliated Trustee includes a per
meeting fee from each fund in the Fund Complex in the amount of $200 per
quarterly or special meeting attended by the Non-Affiliated Trustee, due on the
date of the meeting, plus reasonable expenses incurred by the Non-Affiliated
Trustee in connection with his or her services as a trustee, provided that no
compensation will be paid in connection with certain telephonic special
meetings.
Under the deferred compensation plan, each Non-Affiliated Trustee generally
can elect to defer receipt of all or a portion of the compensation earned by
such Non-Affiliated Trustee until retirement. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to the return on the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such Non-
Affiliated Trustee had invested in one or more funds in the Fund Complex. To the
extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred
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compensation plan is not funded and obligations thereunder represent general
unsecured claims against the general assets of the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
Fund Complex
-----------------------------------------------
Aggregate
Aggregate Estimated
Pension or Maximum Total
Retirement Annual Compensation
Aggregate Benefits Benefits from before
Compensation Accrued as the Fund Deferral from
from the Part of Upon Fund
Name Trust(2) Expenses(3) Retirement(4) Complex(5)
---- ------------ ----------- ------------- -------------
J. Miles Branagan $13,822 $40,303 $60,000 $126,000
Jerry D. Choate (1) 9,618 0 60,000 88,700
Linda Hutton Heagy 13,822 5,045 60,000 126,000
R. Craig Kennedy 13,622 3,571 60,000 125,600
Jack E. Nelson 13,822 21,664 60,000 126,000
Phillip B. Rooney 11,822 7,787 60,000 113,400
Fernando Sisto 13,822 72,060 60,000 126,000
Wayne W. Whalen 13,822 15,189 60,000 126,000
Suzanne H. Woolsey(1) 9,618 0 60,000 88,700
- ------------------------------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table. Mr. Choate and Ms. Woolsey became members of the Board of Trustees
for the Portfolios and other funds in the Fund Complex on May 26, 1999 and
therefore do not have a full year of information to report.
(2) The amounts shown in this column represent the Aggregate Compensation from
all series of the Trust with respect to the Trust's fiscal year ended
December 31, 1999. The details of aggregate compensation for each series
are shown in Table A below. Certain trustees deferred compensation from the
Trust during the fiscal year ended December 31, 1999; the aggregate
compensation deferred for each Portfolio for the fiscal year ended December
31, 1999 is shown in Table B below. Amounts deferred are retained by the
respective Portfolio and earn a rate of return determined by reference to
either the return on the common shares of the Portfolio or other funds in
the Fund Complex as selected by the respective Non-Affiliated Trustee, with
the same economic effect as if such Non-Affiliated Trustee had invested in
one or more funds in the Fund Complex. To the extent permitted by the 1940
Act, each Fund may invest in securities of those funds selected by the
Non-Affiliated Trustees in order to match the deferred compensation
obligation. The cumulative deferred compensation (including interest)
accrued with respect to each trustee from each Portfolio as of the fiscal
year ended December 31, 1999 is shown on Table C below. The deferred
compensation plan is described above the Compensation Table.
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(3) The amounts shown in this column represent the sum of the retirement
benefits accrued by the operating investment companies in the Fund Complex
for each of the trustees for the Funds' respective fiscal years ended in
1999. The retirement plan is described above the Compensation Table.
(4) For each trustee, this is the sum of the estimated maximum annual benefits
payable by the operating investment companies in the Fund Complex for each
year of the 10-year period commencing in the year of such trustee's
anticipated retirement. The Retirement Plan is described above the
Compensation Table. Each Non-Affiliated Trustee of the Board of Trustees
has served as a member of the Board of Trustees since he or she was first
appointed or elected in the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December
31, 1999 before deferral by the trustees under the deferred compensation
plan. Because the funds in the Fund Complex have different fiscal year
ends, the amounts shown in this column are presented on a calendar year
basis. Certain trustees deferred all or a portion of their aggregate
compensation from the Fund Complex during the calendar year ended December
31, 1999. The deferred compensation earns a rate of return determined by
reference to the return on the shares of the funds in the Fund Complex as
selected by the respective Non-Affiliated Trustee, with the same economic
effect as if such Non-Affiliated Trustee had invested in one or more funds
in the Fund Complex. To the extent permitted by the 1940 Act, the Fund may
invest in securities of those investment companies selected by the
Non-Affiliated Trustees in order to match the deferred compensation
obligation. The Advisers and their affiliates also serve as investment
adviser for other investment companies; however, with the exception of Mr.
Whalen, the Non-Affiliated Trustees were not trustees of such investment
companies. Combining the Fund Complex with other investment companies
advised by the Advisers and their affiliates, Mr. Whalen received Total
Compensation of $279,250 during the calendar year ended December 31, 1999.
TABLE A
1999 AGGREGATE COMPENSATION FROM THE TRUST AND EACH PORTFOLIO
PORTFOLIO NAME BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY
-------------- -------- ------ ------ ------- ------ ------ ------ ------ -------
Asset Allocation Portfolio............. 1,277 856 1,277 1,277 1,277 1,077 1,277 1,277 856
Comstock Portfolio..................... 800 800 800 800 800 800 800 800 800
Domestic Income Portfolio.............. 1,223 817 1,223 1,223 1,223 1,023 1,223 1,223 817
Emerging Growth Portfolio.............. 1,491 1,080 1,491 1,291 1,491 1,291 1,491 1,491 1,080
Enterprise Portfolio................... 1,379 935 1,379 1,379 1,379 1,179 1,379 1,379 935
Global Equity Portfolio................ 1,202 802 1,202 1,202 1,202 1,002 1,202 1,202 802
Government Portfolio................... 1,276 856 1,276 1,276 1,276 1,076 1,276 1,276 856
Growth and Income Portfolio............ 1,254 843 1,254 1,254 1,254 1,054 1,254 1,254 843
Money Market Portfolio................. 1,237 828 1,237 1,237 1,237 1,037 1,237 1,237 828
Morgan Stanley Real Estate Securities
Portfolio............................. 1,447 973 1,447 1,447 1,447 1,247 1,447 1,447 973
Strategic Stock Portfolio.............. 1,236 828 1,236 1,236 1,236 1,036 1,236 1,236 828
------ ----- ------ ------ ------ ------ ------ ------ -----
Life Investment Trust Total........... 13,822 9,618 13,822 13,622 13,822 11,822 13,822 13,822 9,618
====== ===== ====== ====== ====== ====== ====== ====== =====
TABLE B
1999 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH PORTFOLIO
PORTFOLIO NAME BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN
-------------- -------- ------ ------ ------- ------ ------ ----- ------
Asset Allocation Portfolio....................... 1,277 636 1,277 639 1,277 1,077 639 1,277
Comstock Portfolio............................... 800 600 800 400 800 800 400 800
Domestic Income Portfolio........................ 1,223 611 1,223 612 1,223 1,023 612 1,223
Emerging Growth Portfolio........................ 1,491 661 1,491 646 1,491 1,291 746 1,491
Enterprise Portfolio............................. 1,379 690 1,379 690 1,379 1,179 690 1,379
Global Equity Portfolio.......................... 1,202 602 1,202 601 1,202 1,002 601 1,202
Government Portfolio............................. 1,276 636 1,276 638 1,276 1,076 638 1,276
Growth and Income Portfolio...................... 1,254 630 1,254 627 1,254 1,054 627 1,254
Money Market Portfolio........................... 1,237 618 1,237 619 1,237 1,037 619 1,237
Morgan Stanley Real Estate Securities Portfolio.. 1,447 714 1,447 724 1,447 1,247 724 1,447
Strategic Stock Portfolio........................ 1,236 619 1,236 618 1,236 1,036 618 1,236
------ ----- ------ ----- ------ ------ ----- ------
Life Investment Trust Total..................... 13,822 7,017 13,822 6,814 13,822 11,822 6,914 13,822
====== ===== ====== ===== ====== ====== ===== ======
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396
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH PORTFOLIO
CURRENT TRUSTEES FORMER TRUSTEES
--------------------------------- ---------------
PORTFOLIO NAME BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN CARUSO GAUGHAN
-------------- -------- ------ ------ ------- -------- ------ ------ ------ ------ -------
Asset Allocation Portfolio................. 5,988 882 5,519 4,530 11,623 5,224 15,387 7,698 1,996 131
Comstock Portfolio......................... 947 833 860 518 1,112 1,219 542 939 0 0
Domestic Income Portfolio.................. 5,722 848 5,169 4,234 11,107 4,951 13,251 7,349 1,318 91
Emerging Growth Portfolio.................. 5,927 1,223 5,357 4,168 11,078 5,318 2,700 7,411 0 276
Enterprise Portfolio....................... 6,231 955 5,873 4,853 12,157 5,516 18,229 8,065 3,223 210
Global Equity Portfolio.................... 5,554 836 5,021 4,092 10,645 4,832 2,483 7,058 0 147
Government Portfolio....................... 5,965 882 5,399 4,384 11,575 5,195 13,634 7,664 1,278 92
Growth and Income Portfolio................ 3,373 874 2,606 1,908 4,429 4,079 1,835 3,311 0 0
Money Market Portfolio..................... 5,680 857 5,085 4,165 11,073 4,945 12,274 7,329 1,155 87
Morgan Stanley Real Estate
Securities Portfolio...................... 6,494 988 6,095 5,025 12,077 6,043 2,975 8,118 0 101
Strategic Stock Portfolio.................. 3,328 859 2,569 1,883 4,373 4,021 1,811 3,268 0 0
------ ------ ------ ------- ------- ------ ------ ------ ----- -----
Life Investment Trust Total............... 55,209 10,037 49,553 39,760 101,249 51,343 85,121 68,210 8,970 1,135
====== ====== ====== ======= ======= ====== ====== ====== ===== =====
FORMER TRUSTEES
-----------------------------------
PORTFOLIO NAME MILLER REES ROBINSON YOVOVICH
-------------- ------ ------ -------- --------
Asset Allocation Portfolio................. 2,061 4,491 4,538 1,513
Comstock Portfolio......................... 0 0 0 916
Domestic Income Portfolio.................. 1,978 3,721 4,245 1,448
Emerging Growth Portfolio.................. 1,851 175 4,095 1,756
Enterprise Portfolio....................... 2,171 5,655 4,859 1,634
Global Equity Portfolio.................... 1,862 169 4,050 1,423
Government Portfolio....................... 2,054 6,229 4,421 1,512
Growth and Income Portfolio................ 0 0 0 1,484
Money Market Portfolio..................... 1,994 5,715 4,098 1,465
Morgan Stanley Real Estate
Securities Portfolio...................... 1,983 185 4,313 1,717
Strategic Stock Portfolio.................. 0 0 0 1,463
------ ------ ------ -------
Life Investment Trust Total............... 15,954 26,340 34,619 16,331
====== ====== ====== =======
TABLE D
BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY
-------- ------ ----- ------- ------ ------ ----- ------ -------
Asset Allocation Portfolio... 1991 1999 1995 1995 1995 1997 1987 1995 1999
Comstock Portfolio........... 1998 1999 1998 1998 1998 1998 1998 1998 1999
Domestic Income Portfolio.... 1991 1999 1995 1995 1995 1997 1987 1995 1999
Emerging Growth Portfolio.... 1995 1999 1995 1995 1995 1997 1995 1995 1999
Enterprise Portfolio......... 1991 1999 1995 1995 1995 1997 1986 1995 1999
Global Equity Portfolio...... 1995 1999 1995 1995 1995 1997 1995 1995 1999
Government Portfolio......... 1991 1999 1995 1995 1995 1997 1986 1995 1999
Growth and Income Portfolio.. 1995 1999 1995 1995 1995 1997 1995 1995 1999
Money Market Portfolio....... 1991 1999 1995 1995 1995 1997 1986 1995 1999
Real Estate Portfolio........ 1995 1999 1995 1995 1995 1997 1995 1995 1999
Strategic Stock Portfolio.... 1997 1999 1997 1997 1997 1997 1997 1997 1999
The Fund, the Adviser, the Subadviser and the Distributor have adopted
Codes of Ethics (collectively, the "Code of Ethics") that set forth general and
specific standards relating to the securities trading activities of their
employees. The Code of Ethics does not prohibit employees from acquiring
securities that may be purchased or held by the Fund, but is intended to ensure
that all employees conduct their personal transactions in a manner that does not
interfere with the portfolio transactions of the Fund or other Van Kampen funds,
or that such employees take unfair advantage of their relationship with the
Fund. Among other things, the Code of Ethics prohibits certain types of
transactions absent prior approval, imposes various trading restrictions (such
as time periods during which personal transactions may or may not be made) and
requires quarterly reporting of securities transactions and other matters. All
reportable securities transactions and other required reports are to be reviewed
by appropriate personnel for compliance with the Code of Ethics. Additional
restrictions apply to portfolio managers, traders, research analysts and others
who may have access to nonpublic information about the trading activities of the
Fund or other Van Kampen funds or who otherwise are involved in the investment
advisory process. Exceptions to these and other provisions of the Code of Ethics
may be granted in particular circumstances after review by appropriate,
personnel.
As of April 3, 2000, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.
INVESTMENT ADVISORY AGREEMENTS
The Trust and the Adviser are parties to an investment advisory agreement
(the "Combined Advisory Agreement") pursuant to which the Trust retains the
Adviser to manage the investment of assets and to place orders for the purchase
and sale of portfolio securities for certain portfolios including the Asset
Allocation Portfolio, the Domestic Income Portfolio, the Enterprise Portfolio,
the Government Portfolio and the Money Market Portfolio (collectively, the
"Combined Portfolios"). The Trust and the Adviser are also parties to other
investment advisory agreements pursuant to which the Adviser manages the
investment of assets and
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397
places orders for the purchase and sale of portfolio securities for the
remaining Portfolios including six advisory agreements designated herein as
"Comstock Advisory Agreement," "Emerging Growth Advisory Agreement," "Global
Equity Advisory Agreement," "Growth and Income Advisory Agreement", "Morgan
Stanley Real Estate Securities Advisory Agreement" and the "Strategic Stock
Advisory Agreement" for the Comstock Portfolio, the Emerging Growth Portfolio,
the Global Equity Portfolio, the Growth and Income Portfolio, the Morgan Stanley
Real Estate Securities Portfolio and the Strategic Stock Portfolio, respectively
(such advisory agreements together with the Combined Advisory Agreement are
referred to herein collectively as the "Advisory Agreements"). Under the
Advisory Agreements, the Adviser obtains and evaluates economic, statistical,
and financial information to formulate strategy and implement each Portfolio's
investment objective. The Adviser also furnishes offices, necessary facilities
and equipment, provides administrative services, and permits its officers and
employees to serve without compensation as trustees of the Trust or officers of
the Portfolios if elected to such positions.
Under the Advisory Agreements, the Trust bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of each Portfolio. The costs of such
accounting services include the salaries and overhead expenses of a Treasurer or
other principal financial officer and the personnel operating under his
direction. The services are provided at cost which is allocated among the
investment companies advised by the Adviser. A portion of these amounts are paid
to the Adviser or its parent as reimbursement of personnel, office space,
facilities and equipment costs attributable to the provision of accounting
services to the Trust. The Trust also pays custodian fees, legal and independent
accountant fees, trustee fees (other than those who are affiliated persons of
the Adviser, Distributor or Van Kampen Investments) the costs of reports and
proxies to shareholders and all other ordinary expenses not specifically assumed
by the Adviser. The Advisory Agreements also provide that the Adviser shall not
be liable to the Trust for any actions or omissions in the absence of willful
misfeasance, bad faith, negligence or reckless disregard of its obligations and
duties under the Advisory Agreements.
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Under the Advisory Agreements, the Trust pays to the Adviser as
compensation for the services rendered, facilities furnished, and expenses paid
by it, an annual fee payable monthly computed on average daily net assets as
follows:
- --------------------------------------------------------------------
Asset Allocation Portfolio, Domestic Income Portfolio,
Enterprise Portfolio, Government Portfolio and Money Market
Portfolio (based upon their combined average daily net
assets)
First $500 million........................................ 0.50%
Next $500 million......................................... 0.45%
Over $1 billion........................................... 0.40%
(The resulting fee is prorated to each of these
Portfolios based upon their respective average daily
net assets.)
Comstock Portfolio and Growth and Income Portfolio (based on
each Portfolio's average daily net assets)
First $500 million........................................ 0.60%
Over $500 million......................................... 0.55%
Emerging Growth Portfolio (based upon the Portfolio's
average daily net assets)
First $500 million........................................ 0.70%
Next $500 million......................................... 0.65%
Over $1 billion........................................... 0.60%
Global Equity Portfolio (based upon the Portfolio's average
daily net assets)
First $500 million........................................ 1.00%
Next $500 million......................................... 0.95%
Over $1 billion........................................... 0.90%
Morgan Stanley Real Estate Securities Portfolio (based upon
the Portfolio's average daily net assets)
First $500 million........................................ 1.00%
Next $500 million......................................... 0.95%
Over $1 billion........................................... 0.90%
Strategic Stock Portfolio
First $500 million........................................ 0.50%
Over $500 million......................................... 0.45%
For the Global Equity Portfolio and Morgan Stanley Real Estate Securities
Portfolio, the Adviser has entered into subadvisory agreements (the "Subadvisory
Agreement") to assist the Adviser in performing its investment advisory
functions. Under the Subadvisory Agreements, the Subadviser receives on an
annual basis 50% of the net advisory fees received by the Adviser with respect
to such Portfolios.
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399
The Adviser has voluntarily agreed to reimburse the Portfolios for all
expenses as a percent of average daily net assets in excess of the following:
- --------------------------------------------------------------------
Asset Allocation Portfolio.................................. 0.60%
Domestic Income Portfolio................................... 0.60%
Enterprise Portfolio........................................ 0.60%
Government Portfolio........................................ 0.60%
Money Market Portfolio...................................... 0.60%
Comstock Portfolio.......................................... 0.95%
Emerging Growth Portfolio................................... 0.85%
Global Equity Portfolio..................................... 1.20%
Growth and Income Portfolio................................. 0.75%
Morgan Stanley Real Estate Securities Portfolio............. 1.10%
Strategic Stock Portfolio................................... 0.65%
The Combined Advisory Agreement also provides that, in the event the
ordinary business expenses of any of the Combined Portfolios for any fiscal year
exceed 0.95% of the average daily net assets, the compensation due the Adviser
will be reduced by the amount of such excess and that, if a reduction in and
refund of the advisory fee is insufficient, the Adviser will pay the Combined
Portfolios monthly an amount sufficient to make up the deficiency, subject to
readjustment during the year. Ordinary business expenses do not include (1)
interest and taxes, (2) brokerage commissions, (3) any distribution expenses
which may be incurred in the event the Combined Portfolios' Distribution Plan is
implemented, and (4) certain litigation and indemnification expenses as
described in the Combined Advisory Agreement.
The average daily net assets of a Portfolio is determined by taking the
average of all of the determinations of net assets of that Portfolio for each
business day during a given calendar month. The fee is payable for each calendar
month as soon as practicable after the end of that month. The fee payable to the
Adviser is reduced by any commissions, tender solicitation and other fees,
brokerage or similar payments received by the Adviser or any other direct or
indirect majority owned subsidiary of Van Kampen Investments, in connection with
the purchase and sale of portfolio investments of the Portfolios, less any
direct expenses incurred by such subsidiary of Van Kampen Investments in
connection with obtaining such payments. The Adviser agrees to use its best
efforts to recapture tender solicitation fees and exchange offer fees for the
Portfolios benefit, and to advise the Trustees of the Portfolios of any other
commissions, fees, brokerage or similar payments which may be possible under
applicable laws for the Adviser or any other direct or indirect majority owned
subsidiary of Van Kampen Investments, to receive in connection with the
Portfolios investment transactions or other arrangements which may benefit the
Portfolios.
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400
The following table shows the approximate expenses paid under the Advisory
Agreements during the periods ended December 31, 1999, 1998 and 1997.
GROWTH
ASSET DOMESTIC EMERGING GLOBAL AND
PERIOD ENDING ALLOCATION COMSTOCK INCOME GROWTH ENTERPRISE EQUITY GOVERNMENT INCOME
DECEMBER 31, 1999: PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------ --------- --------- --------- --------- ---------- --------- ---------- ---------
Advisory fees $277,200 $ 4,600 $ 85,500 $623,100 $675,000 $ 34,700 $275,400 $258,600
Accounting Services $ 25,200 $ 22,100 $ 16,200 $ 25,900 $ 42,900 $ 7,100 $ 29,300 $ 22,700
Contractual expense
reimbursement $ -0- $ -0- $ 24,490 $ -0- $ -0- $ -0- $ -0- $ -0-
Voluntary expense
reimbursement $ 95,967 $ 72,613 $ 61,741 $ 28,250 $ 36,478 $125,524 $ 76,349 $ 73,947
MORGAN
STANLEY
REAL
MONEY ESTATE STRATEGIC
PERIOD ENDING MARKET SECURITIES STOCK
DECEMBER 31, 1999: PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------ --------- ---------- ---------
Advisory fees $146,500 $1,761,100 $137,200
Accounting Services $ 24,100 $ 66,600 $ 17,300
Contractual expense
reimbursement $ -0- $ -0- $ -0-
Voluntary expense
reimbursement $ 91,001 $ 39,541 $ 69,223
PERIOD ENDING
DECEMBER 31, 1998:
- ------------------
Advisory fees $ 308,215 n/a $86,159 $131,521 $539,143 $ 32,086 $268,947 $127,069 $108,585
Accounting Services $ 33,100 n/a $23,600 $ 22,900 $ 42,800 $ 38,100 $ 32,700 $ 24,500 $ 13,678
Contractual expense
reimbursement $ -0- n/a $24,760 $ -0- $ -0- $ -0- $ -0- $ -0- $ 7,952
Voluntary expense
reimbursement $ 74,236 n/a $60,335 $ 71,860 $ 40,178 $162,179 $ 70,011 $ 72,329 $ 76,068
PERIOD ENDING
DECEMBER 31, 1998:
- ------------------
Advisory fees $2,511,823 $56,672
Accounting Services $ 73,500 $17,500
Contractual expense
reimbursement $ -0- $ -0-
Voluntary expense
reimbursement $ -0- $68,772
PERIOD ENDING
DECEMBER 31, 1997:
- ------------------
Advisory fees $ 311,514 n/a $86,700 $ 48,713 $467,494 $ 31,290 $267,568 $ 30,777 $106,891
Accounting Services $ 14,290 n/a $ 8,861 $ 9,145 $ 19,566 $ 21,596 $ 13,895 $ 4,410 $ 10,155
Contractual expense
reimbursement $ -0- n/a $17,857 $ -0- $ -0- $ -0- $ -0- $ -0- $ 6,147
Voluntary expense
reimbursement $ 68,780 n/a $60,681 $ 89,683 $ 55,090 $174,632 $ 72,820 $ 45,369 $ 74,791
PERIOD ENDING
DECEMBER 31, 1997:
- ------------------
Advisory fees $2,269,511 $ 1,083
Accounting Services $ 32,983 $ -0-
Contractual expense
reimbursement $ -0- $ -0-
Voluntary expense
reimbursement $ -0- $ 4,892
The Advisory Agreements with respect to each subject Portfolio may be
continued from year to year if specifically approved at least annually (a)(i) by
the Trustees or (ii) by a vote of a majority of such Portfolio's outstanding
voting securities and (b) by the affirmative vote of a majority of the Trustees
who are not parties to the agreement or interested persons of any such party by
votes cast in person at a meeting called for such purpose. The Advisory
Agreements provide that an agreement shall terminate automatically if assigned
and that it may be terminated without penalty by either party on 60 days'
written notice.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the shares of the
Trust pursuant to a written agreement (the "Distribution and Service
Agreement"). The Distributor's obligation is an agency or "best efforts"
arrangement under which the Distributor is not obligated to sell any stated
number of shares. The Distribution and Service Agreement is renewable from year
to year if approved (a) by the Trust's Trustees or by a vote of a majority of
the Trust's outstanding voting securities and (b) by the affirmative vote of a
majority of Trustees who are not parties to the Distribution and Service
Agreement or interested persons of any party, by votes cast in person at a
meeting called for that purpose. The Distribution and Service Agreement provides
that it will terminate if assigned, and that it may be terminated without
penalty by either party on 90 days' written notice.
The Distributor bears the cost of printing (but not typesetting)
prospectuses used in connection with this offering and certain other costs
including the cost of supplemental sales literature and advertising. The Trust
pays all expenses attributable to the registrations of its shares under federal
law, including registration and
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401
filing fees, the cost of preparation of the prospectuses, related legal and
auditing expenses, and the cost of printing prospectuses for current
shareholders.
Each Portfolio has adopted a distribution plan (the "Distribution Plan")
with respect to its Class II Shares pursuant to Rule 12b-1 under the 1940 Act.
Each Portfolio also has adopted a service plan (the "Service Plan") with respect
to its Class II Shares. The Distribution Plan and the Service Plan sometimes are
referred to herein as the "Plans". The Plans provide that a Portfolio may spend
a portion of the average daily net assets attributable to its Class II Shares in
connection with distribution of such class of shares and in connection with the
provision of ongoing services to shareholders of such class. The Distribution
Plan and the Service Plan are being implemented through the Distribution and
Service Agreement with the Distributor and sub-agreements with parties that may
provide for their customers or clients certain services or assistance, which may
include, but not be limited to, processing purchase and redemption transactions,
establishing and maintaining shareholder accounts regarding a Portfolio, and
such other services as may be agreed to from time to time and as may be
permitted by applicable statute, rule or regulation.
The Distributor must submit quarterly reports to the Board of Trustees of
the Trust setting forth separately by Portfolio all amounts paid under the
Distribution Plan and the purposes for which such expenditures were made,
together with such other information as from time to time is reasonably
requested by the Trustees. The Plans provide that they will continue in full
force and effect from year to year so long as such continuance is specifically
approved by a vote of the Trustees, and also by a vote of the disinterested
Trustees, cast in person at a meeting called for the purpose of voting on the
Plans. Each of the Plans may not be amended to increase materially the amount to
be spent for the services described therein with respect to Class II Shares
without approval by a vote of a majority of the outstanding voting shares of
Class II Shares, and all material amendments to either of the Plans must be
approved by the Trustees and also by the disinterested Trustees. Each of the
Plans may be terminated with respect to Class II Shares at any time by a vote of
a majority of the disinterested Trustees or by a vote of a majority of the
outstanding voting shares of Class II Shares.
For the Class II Shares of a Portfolio, in any given year in which the
Plans are in effect, the Plans generally provide for a Portfolio to pay the
Distributor the lesser of (i) the applicable amount of the Distributor's actual
distribution and service expenses incurred that year, plus any actual
distribution and service expenses from prior years that are still unpaid by the
Portfolio for such class of shares or (ii) the applicable plan fees for such
class of shares at the rates specified in the Portfolio's Prospectus. Except as
may be mandated by applicable law, the Portfolio does not impose any limit with
respect to the number of years into the future that such unreimbursed actual
expenses may be carried forward. These unreimbursed actual expenses may or may
not be recovered through plan fees in future years. If the Plans are terminated
or not continued, the Portfolio would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Portfolio.
TRANSFER AGENT
The Fund's transfer agent, shareholder service agent and dividend
disbursing agent is Van Kampen Investor Services Inc. The transfer agency prices
are determined through negotiations with the Board of Trustees of the Trust and
are based on competitive market benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Portfolios, the selection of brokers and dealers to effect the transactions and
the negotiation of prices and any brokerage commissions on such transactions.
While the Adviser will be primarily responsible for the placement of the
Portfolios' investments, the policies and practices in this regard will at all
times be subject to review by the Board of Trustees.
B-52
402
Transactions in debt securities generally made by the Fund are principal
transactions at net prices with little or no brokerage costs. Such securities
are normally purchased directly from the issuer or in the over-the-counter
market from an underwriter or market maker for the securities. Purchases from
underwriters of portfolio securities include a commission or concession paid by
the issuer to the underwriter and purchases from dealers serving as market
makers include a spread or markup to the dealer between the bid and asked price.
Sales to dealers are effected at bid prices. The Portfolios may also purchase
certain money market instruments directly from an issuer, in which case no
commissions or discounts are paid, or may purchase and sell listed bonds on a
exchange, which are effected through brokers who charge a commission for their
services.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Portfolios and not according to
any formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker/dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to the Portfolios and still must be
analyzed and reviewed by its staff, the receipt of research information is not
expected to reduce its expenses materially. The investment advisory fee is not
reduced as a result of the Adviser's receipt of such research services. Services
provided may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or pur-chasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Fund.
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with the Portfolios, the Adviser or the
Distributor and with brokerage firms participating in the distribution of the
Portfolios' shares if it reasonably believes that the quality of execution and
the commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services or to a firm
participating in the distribution of the Portfolios' shares.
The Adviser may place Portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for the Portfolios and another advisory
account. In some cases, this procedure could have an adverse effect on the price
or the amount of securities available to the Portfolios. In making such
allocations among the Portfolios and other advisory accounts, the main factors
considered by the Adviser are the respective sizes of the Portfolios and other
advisory accounts, the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and
opinions of the persons responsible for recommending the investment.
Effective October 31, 1996, Morgan Stanley & Co. Incorporated ("Morgan
Stanley") became an affiliate of the Adviser. Effective May 31, 1997, Dean
Witter Reynolds, Inc. ("Dean Witter") became an affiliate of the Adviser. The
Board of Trustees has adopted certain policies incorporating the standards of
Rule 17e-1 issued by the SEC under the 1940 Act which requires that the
commissions paid to affiliates of the Portfolios
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403
must be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time. The rule and procedures also contain review requirements and require
the Adviser to furnish reports to the trustees and to maintain records in
connection with such reviews. After consideration of all factors deemed
relevant, the trustees will consider from time to time whether the advisory fee
for the Fund will be reduced by all or a portion of the brokerage commission
given to affiliated brokers.
The Portfolios paid the following commissions to these brokers during the
periods shown:
AFFILIATED BROKERS
-----------------------------------------------------
MORGAN STANLEY DEAN WITTER
------------------------------------ -----------
Fiscal year ended 1999.................... $3,048 (Asset Allocation Portfolio) -0-
$ 78 (Comstock Portfolio)
$ 320 (Emerging Growth Portfolio)
$4,670 (Enterprise Portfolio)
$2,743 (Growth and Income Portfolio)
Fiscal year ended 1998.................... -0- -0-
Fiscal year ended 1997.................... -0- -0-
Fiscal year 1999 Percentages:
Commissions with affiliate to total
commissions.......................... 5.90% (Asset Allocation Portfolio) -0-
8.19% (Comstock Portfolio)
0.39% (Emerging Growth Portfolio)
1.55% (Enterprise Portfolio)
3.17% (Growth and Income Portfolio)
Value of brokerage transactions with
affiliate to total transactions...... 0.07% (Asset Allocation Portfolio) -0-
0.34% (Comstock Portfolio)
0.01% (Emerging Growth Portfolio)
0.12% (Enterprise Portfolio)
0.14% (Growth and Income Portfolio)
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The following table summarizes for each portfolio the total brokerage
commissions paid, the amount of commissions paid to brokers selected primarily
on the basis of research services provided to the Adviser and the value of these
specific transactions.
ASSET DOMESTIC EMERGING GLOBAL
ALLOCATION COMSTOCK ENTERPRISE GOVERNMENT INCOME GROWTH EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ----------- ------------ ---------- ----------- ------------ ---------
1999
- -----------------------------
Total brokerage commissions $ 51,683 $ 952 $ 301,161 $15,648 -- $ 82,609 $ 596
Commissions for research
services $ 41,590 $ 1,738 $ 200,678 -- -- $ 75,067 --
Value of research
transactions $ 41,719,670 $1,810,897 $171,892,773 -- -- $241,772,787 --
1998
- -----------------------------
Total brokerage commissions $ 121,933 N/A $ 195,688 $34,884 -- $ 26,685 $ 118
Commissions for research
services $ 69,166 N/A $ 72,273 -- -- $ 17,365 --
Value of research
transactions $ 52,524,399 N/A $ 59,194,331 -- -- $ 33,681,640 --
1997
- -----------------------------
Total brokerage commissions $ 100,020 N/A $ 140,036 $30,799 -- $ 10,436 $13,550
Commissions for research
services $ 27,325 N/A $ 47,085 -- -- $ 5,597 --
Value of research
transactions $ 17,590,482 N/A $ 51,189,635 -- -- $ 9,900,077 --
MORGAN STANLEY
REAL ESTATE GROWTH AND MONEY STRATEGIC
SECURITIES INCOME MARKET STOCK
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ----------- ------------ ------------
1999
- -----------------------------
Total brokerage commissions $ 306,677 $ 86,408 -- $ 18,059
Commissions for research
services $ 296,872 $ 71,230 -- $ 17,870
Value of research
transactions $124,978,324 $ 66,920,240 -- $ 31,879,129
1998
- -----------------------------
Total brokerage commissions $ 1,216,987 $ 38,200 -- $ 11,412
Commissions for research
services $ 1,168,101 $ 20,979 -- $ 11,412
Value of research
transactions $502,717,341 $ 27,958,579 -- $ 19,379,770
1997
- -----------------------------
Total brokerage commissions $ 1,823,718 $ 13,809 -- $ 1,172
Commissions for research
services $ 1,446,147 -- -- $ 1,172
Value of research
transactions $656,816,992 -- -- $ 2,327,597
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Portfolio is computed by dividing
the value of all securities held by the Portfolio plus other assets, less
liabilities, by the number of shares outstanding. This computation is determined
for each Portfolio as of the close of business of the New York Stock Exchange
(the "Exchange") (currently 4:00 p.m., New York time) on each business day on
which the Exchange is open.
MONEY MARKET PORTFOLIO NET ASSET VALUATION
The Portfolio's use of the amortized cost method of valuing its portfolio
securities is permitted by a rule adopted by the SEC. Under this rule, the
Portfolio must maintain a dollar-weighted average portfolio maturity of 90 days
or less, purchase only instruments having remaining maturities of thirteen
months or less and invest only in securities determined by the Adviser to be of
eligible quality with minimal credit risks. The valuation of each Portfolio's
investments is based upon their amortized cost, which does not take into account
unrealized capital gains or losses. Amortized cost valuation involves initially
valuing an instrument at its cost and thereafter, assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price that
the Portfolio would receive if it sold the instrument.
The Portfolio has established procedures reasonably designed, taking into
account current market conditions and the Portfolio's investment objective, to
stabilize the net asset value per share for purposes of sales and redemptions at
$1.00. These procedures include review by the Board of Trustees, at such
intervals as the Board of Trustees deem appropriate, to determine the extent, if
any, to which the new asset value per share calculated by using available market
quotations deviates from $1.00 per share based on amortized cost. In the event
such deviation should exceed four tenths of one percent, the Board of Trustees
are required to promptly consider what action, if any, should be initiated. If
the Board of Trustees believe that the extent of any deviation from a $1.00
amortized cost price per share may result in material dilution or other unfair
results to new or existing shareholders, it will take such steps as it considers
appropriate to eliminate or reduce these consequences to the extent reasonably
practicable. Such steps may include selling portfolio securities prior to
B-55
405
maturity; shortening the average maturity of the portfolio; withholding or
reducing dividends; or utilizing a net asset value per share determined by using
available market quotations.
ASSET ALLOCATION, COMSTOCK, DOMESTIC INCOME, EMERGING GROWTH, ENTERPRISE, GLOBAL
EQUITY, GROWTH AND INCOME, MORGAN STANLEY REAL ESTATE SECURITIES AND STRATEGIC
STOCK PORTFOLIOS NET ASSET VALUATION
The net asset value of these Portfolios is computed by (i) valuing
securities listed or traded on a national securities exchange at the last sale
price, or if there has been no sale that day at the mean between the last
reported bid and asked prices (ii) valuing unlisted securities for which
over-the-counter market quotations are readily available at the most recent bid
price as supplied by National Association of Securities Dealers Automated
Quotations ("NASDAQ") or by broker-dealers, and (iii) valuing any securities for
which market quotations are not readily available, and any other assets at fair
value as determined in good faith by the Adviser based on procedures approved by
the Trustees. Options, futures contracts and options thereon, which are traded
on exchanges, are valued at their last sale or settlement price as of the close
of such exchanges or if no sales are reported, at the mean between the last
reported bid and asked prices. Securities with a remaining maturity of 60 days
or less are valued on an amortized cost basis, which approximates market value.
Securities for which market quotations are not readily available and any other
assets are valued at fair value as determined in good faith by the Adviser based
on procedures approved by the Board of Trustees.
GOVERNMENT PORTFOLIO NET ASSET VALUATION
U.S. Government securities are traded in the over-the-counter market and
are valued at the mean between the last reported bid and asked prices. Such
valuations are based on quotations of one or more dealers that make markets in
the securities as obtained from such dealers or from a pricing service. Options,
interest rate futures contracts and options thereon, which are traded on
exchanges, are valued at their last sale or settlement price as of the close of
such exchanges or if no sales are reported, at the mean between the last
reported bid and asked prices. Securities with a remaining maturity of 60 days
or less are valued on an amortized cost basis, which approximates market value.
Securities for which market quotations are not readily available and any other
assets are valued at fair value as determined in good faith by the Adviser based
on procedures approved by the Board of Trustees.
FAIR VALUE PRICING
Trading in securities on many foreign securities exchanges (including
European and Far Eastern securities exchange) and over-the-counter markets is
normally completed before the close of business on each business day in New York
(i.e., a day on which the Exchange is open). In addition, securities trading in
a particular country or countries may not take place on all business days for
the Exchange or may take place on days which are not business days for the
Exchange. Changes in valuations on certain securities may occur at times or on
days on which a Portfolio's net asset value is not calculated and on which a
Portfolio does not effect sales, redemptions and exchanges of its shares. The
Portfolio calculates net asset value per share, and therefore effects sales,
redemptions and exchanges of its shares, as of the close of trading on the
Exchange each day the Exchange is open for trading. Such calculation does not
take place contemporaneously with the determination of the prices of certain
foreign portfolio securities used in such calculation. If events materially
affecting the value of such securities occur between the time when their price
is determined and the time when a Portfolio's net asset value is calculated,
such securities may be valued at fair value as determined in good faith by the
Adviser based in accordance with procedures established by the Board of
Trustees.
PURCHASE AND REDEMPTION OF SHARES
The purchase of shares of the Portfolios is currently limited to the
Accounts as explained in the Portfolios' Prospectuses. Such shares are sold and
redeemed at their respective net asset values as described in the Portfolios'
Prospectuses.
B-56
406
Redemptions are not made on days during which the Exchange is closed. The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) the SEC determines trading on the
Exchange is restricted; (c) the SEC determines an emergency exists as a result
of which disposal by the Portfolio of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Portfolio to fairly
determine the value of its net assets; or (d) the SEC, by order, so permits.
TAX STATUS
FEDERAL INCOME TAXATION OF THE PORTFOLIOS
The Trust and each of its Portfolios will be treated as separate
corporations for federal income tax purposes. The Portfolios have each elected
and qualified, and intend to continue to qualify each year, to be treated as
regulated investment companies under Subchapter M of the Internal Revenue Code
(the "Code"). To qualify as a regulated investment company, each Portfolio must
comply with certain requirements of the Code relating to, among other things,
the source of its income and diversification of its assets.
If a Portfolio so qualifies and distributes each year to its shareholders
at least 90% of its investment company taxable income (generally taxable income
and net short-term capital gain) and meets certain other requirements, it will
not be required to pay federal income taxes on any income it distributes to
shareholders. Each Portfolio intends to distribute at least the minimum amount
of investment company taxable income necessary to satisfy the 90% distribution
requirement. A Portfolio will not be subject to any federal income tax on any
net capital gain distributed to shareholders.
In order to avoid a 4% excise tax, each Portfolio that does not meet the
requirements of Code Section 4982(f) will be required to distribute, by December
31st of each year, at least an amount equal to the sum of (i) 98% of its
ordinary income for such year and (ii) 98% of its capital gain net income (the
latter of which generally is computed on the basis of the one-year period ending
on October 31st of such year), plus any amounts that were not distributed in
previous taxable years. For purposes of the excise tax, any ordinary income or
capital gain net income retained by, and subject to federal income tax in the
hands of, a Portfolio will be treated as having been distributed.
If a Portfolio failed to qualify as a regulated investment company or
failed to satisfy the 90% distribution requirement in any taxable year, such
Portfolio would be taxed as an ordinary corporation on its taxable income (even
if such income were distributed to its shareholders) and all distributions out
of earnings and profits would be taxed to shareholders as ordinary income. To
qualify again as a regulated investment company in a subsequent year, such
Portfolio may be required to pay an interest charge on 50% of its earnings and
profits attributable to non-regulated investment company years and would be
required to distribute such earnings and profits to shareholders (less any
interest charge). In addition, if the Portfolio failed to qualify as a regulated
investment company for its first taxable year or, if immediately after
qualifying as a regulated investment company for any taxable year, it failed to
qualify for a period greater than one taxable year, the Portfolio would be
required to recognize any net built-in gains (the excess of aggregate gains,
including items of income, over aggregate losses that would have been realized
if it had been liquidated) in order to qualify as a regulated investment company
in a subsequent year.
Some of the Portfolios' investment practices are subject to special
provisions of the Code that, among other things, may defer the use of certain
losses of a Portfolio, affect the holding period of the securities held by such
Portfolio and alter the character of the gains or losses realized by the
Portfolio. These provisions may also require the Portfolio to recognize income
or gain without receiving cash with which to make distributions in amounts
necessary to satisfy the 90% distribution requirement and the distribution
requirements for avoiding income and excise taxes. Each Portfolio will monitor
its transactions and may make certain tax elections in order to mitigate the
effect of these rules and prevent disqualification of such Portfolio as a
regulated investment company.
B-57
407
Investments of a Portfolio in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, a
Portfolio will be required to accrue as income each year a portion of the
discount and to distribute such income each year in order to maintain its
qualification as a regulated investment company and to avoid income and excise
taxes. In order to generate sufficient cash to make distributions necessary to
satisfy the 90% distribution requirement and to avoid income and excise taxes,
such Portfolio may have to dispose of securities that it would otherwise have
continued to hold.
PASSIVE FOREIGN INVESTMENT COMPANIES. A Portfolio may invest in stock of
"passive foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation that, in general, meets either of the following tests: (i) at least
75% of its gross income is passive income or (ii) an average of at least 50% of
its assets produce, or are held for the production of, passive income. Under
certain circumstances, a regulated investment company that holds stock of a PFIC
will be subject to federal income tax on (i) a portion of any "excess
distribution" received on such stock or (ii) any gain from a sale or disposition
of such stock (collectively, "PFIC income"), plus interest on such amounts, even
if the regulated investment company distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
the regulated investment company's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders. If a Portfolio invests in a PFIC and elects to treat the
PFIC as a "qualified electing fund," then in lieu of the foregoing tax and
interest obligation, such Portfolio would be required to include in income each
year its pro rata share of the qualified electing fund's annual ordinary income
earnings and net capital gain, which most likely would have to be distributed to
satisfy the 90% distribution requirement and the distribution requirement for
avoiding income and excise taxes. In most instances it will be very difficult to
make this election due to certain requirements imposed with respect to the
election.
As an alternative to making the above-described election to treat the PFIC as
a qualified electing fund, a Portfolio may make an election to annually mark-to-
market PFIC stock that it owns (a "PFIC Mark-to-Market Election"). "Marking-to-
market," in this context, means recognizing as ordinary income or loss each year
an amount equal to the difference between such Portfolio's adjusted tax basis in
such PFIC stock and its fair market value. Losses will be allowed only to the
extent of net mark-to-market gain previously included by the Portfolio pursuant
to the election for prior taxable years. A Portfolio may be required to include
in its taxable income for the first taxable year in which it makes a PFIC Mark-
to-Market Election an amount equal to the interest charge that would otherwise
accrue with respect to distributions on, or dispositions of, the PFIC stock.
This amount would not be deductible from the Portfolio's taxable income. The
PFIC Mark-to-Market Election applies to the taxable year for which made and to
all subsequent taxable years, unless the Internal Revenue Service ("IRS")
consents to revocation of the election. By making the PFIC Mark-to-Market
Election, the Portfolio could ameliorate the adverse tax consequences arising
from its ownership of PFIC stock, but in any particular year may be required to
recognize income in excess of the distributions it receives from the PFIC and
proceeds from the dispositions of PFIC stock.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions of a Portfolio's investment company taxable income are taxable
to shareholders as ordinary income to the extent of such Portfolio's earnings
and profits, whether paid in cash or reinvested in additional shares.
Distributions of a Portfolio's net capital gain as capital gain dividends, if
any, are taxable to shareholders as long-term capital gains regardless of the
length of time shares of such Portfolio have been held by such shareholders.
Distributions in excess of the Portfolio's earnings and profits will first
reduce the adjusted tax basis of a holder's shares and, after such adjusted tax
basis is reduced to zero, will constitute capital gains to such holder (assuming
such shares are held as a capital asset).
Shareholders receiving distributions in the form of additional shares issued
by a Portfolio will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the
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408
shares received, determined as of the distribution date. The basis of such
shares will equal the fair market value on the distribution date.
Each Portfolio will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. Some portion of
the distributions from a Portfolio may be eligible for the dividends received
deduction for corporations if such Portfolio receives qualifying dividends
during the year and if certain other requirements of the Code are satisfied.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by a Portfolio and
received by the shareholder on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of a Portfolio may be "spilled back" and treated as paid by the Portfolio
(except for purposes of the 4% excise tax) during such taxable year. In such
case, shareholders will be treated as having received such dividends in the
taxable year in which the distribution was actually made.
Income from investments in foreign securities received by a Portfolio may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes.
Shareholders of a Portfolio may be entitled to claim United States foreign tax
credits with respect to such taxes, subject to certain provisions and
limitations contained in the Code. If more than 50% in value of a Portfolio's
total assets at the close of its taxable year consists of securities of foreign
issuers and, in the case of foreign withholding taxes paid with respect to
dividends from foreign corporations, such Portfolio satisfies certain holding
period and other requirements, the Portfolio will be eligible to file, and may
file, an election with the IRS pursuant to which shareholders of the Portfolio
will be required (i) to include their respective pro rata portions of such taxes
in their United States income tax returns as gross income and (ii) to treat such
respective pro rata portions as taxes paid by them. Each shareholder will be
entitled, subject to certain limitations, either to deduct his pro rata portion
of such foreign taxes in computing his taxable income or to credit them against
his United States federal income tax liability. Each shareholder of a Portfolio
that may be eligible to file the election described in this paragraph will be
notified annually whether the foreign taxes paid by such Portfolio will "pass
through" for that year and, if so, such notification will designate (i) the
shareholder's portion of the foreign taxes paid to each country and (ii) the
portion of dividends that represent income derived from sources within each
country. The amount of foreign taxes for which a shareholder may claim a credit
in any year will be subject to an overall limitation such that the credit may
not exceed the shareholder's United States federal income tax attributable to
the shareholder's foreign source taxable income. This limitation generally
applies separately to certain specific categories of foreign source income
including "passive income," which includes dividends and interest. Because
application of the foregoing rules depends on the particular circumstances of
each shareholder, shareholders are advised to consult their tax advisers.
Certain foreign currency gains or losses attributable to currency exchange
rate fluctuations are treated as ordinary income or loss. Such income or loss
may increase or decrease (or possibly eliminate) a Portfolio' income available
for distribution. If, under the rules governing the tax treatment of foreign
currency gains and losses, such Portfolio's income available for distribution is
decreased or eliminated, all or a portion of the dividends declared by the
Portfolio may be treated for federal income tax purposes as a return of
capital,or in some circumstances, as capital gains. Generally, a shareholder's
tax basis in Portfolio shares will be reduced to the extent that an amount
distributed to such shareholder is treated as a return of capital.
SALE OF SHARES
The sale of shares (including transfers in connection with a redemption or
repurchase of shares) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
and the amount received. If such shares are held as a capital asset, the gain or
loss will be a capital gain or loss. Any loss recognized upon
B-59
409
a taxable disposition of shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividends received with
respect to such shares. For purposes of determining whether shares have been
held for six months or less, the holding period is suspended for any periods
during which the shareholder's risk of loss is diminished as a result of holding
one or more other positions in substantially similar or related property or
through certain options or short sales.
GENERAL
The federal income tax discussions set forth above is for general information
only. Prospective investors and shareholders should consult their advisers
regarding the specific federal tax consequences of purchasing, holding and
disposing of shares, as well as the effects of state, local and foreign tax law
and any proposed tax law changes.
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PORTFOLIO PERFORMANCE
The average annual total return and yield, if applicable, for each Portfolio
are shown in the table below. These results are based on historical earnings and
asset value fluctuations and are not intended to indicate future performance.
Such information should be considered in light of each Portfolio's investment
objectives and policies as well as the risks incurred in each Portfolio's
investment practices. All total return figures are for the Trust's fiscal year
ended December 31, 1999. The information shown is for Class I Shares of each
Portfolio; the Class II Shares, which were not offered prior to April 28, 2000,
will be shown separately in future Statements of Additional Information.
CLASS I SHARES
TOTAL RETURN CUMULATIVE
TOTAL RETURN TOTAL RETURN FOR TEN YEAR NON-STANDARDIZED
FOR ONE YEAR FOR FIVE YEAR PERIOD OR TOTAL RETURN
PERIOD PERIOD SINCE INCEPTION SINCE INCEPTION
------------ ------------- --------------- ---------------
Asset Allocation Portfolio
commencement date 06/30/87..................... 4.94% 17.21% 12.29% 293.43%
Comstock Portfolio
commencement date 4/30/99...................... n/a n/a -5.53%* -5.53%
Domestic Income Portfolio
commencement date 11/04/87..................... -1.55% 8.69% 7.88% 135.63%
Emerging Growth Portfolio
commencement date 07/03/95..................... 104.38% n/a 40.58%* 362.47%
Enterprise Portfolio
commencement date 04/07/86..................... 25.85% 28.57% 17.58% 539.50%
Global Equity Portfolio
commencement date 07/03/95..................... 30.06% n/a 19.23%* 120.50%
Government Portfolio
commencement date 04/07/86..................... -3.36% 6.60% 6.54% 134.90%
Growth and Income Portfolio
commencement date 12/23/96..................... 12.99% n/a 18.48%* 66.95%
Money Market Portfolio
commencement date 04/07/86..................... 4.63% 5.01% 4.81% 108.07%
Morgan Stanley Real Estate Securities
Portfolio commencement date 07/03/95........... -3.37% n/a 10.70%* 57.95%
Strategic Stock Portfolio
commencement date 11/03/97..................... -0.47% n/a 8.33%* 18.87%
* Denotes since inception.
From time to time, the Portfolios, except the Money Market Portfolio, may
advertise their total return for prior periods. Any such advertisement would
include at least average annual total return quotations for one, five and ten
year periods or for the life of the Portfolio. Other total return quotations,
aggregate or average, over other time periods may also be included. Total return
calculations do not take into account expenses at the "wrap" or contractholder
level as explained in the prospectus. Investors should also review total return
calculations that include those expenses.
The total return of a Portfolio for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the
Portfolio from the beginning to the end of the period. Total return is
calculated by subtracting the value of the initial investment from the ending
value and showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the maximum public
offering price and that all income dividends or capital gains distributions
during the period are reinvested in Portfolio shares at net asset value. Total
return is based on historical earnings and asset value fluctuations and is not
intended to indicate future performance. A Portfolio's total return will vary
depending on market conditions, the securities comprising the Portfolio's
investment holdings, the Portfolio's operating
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expenses and unrealized net capital gains or losses during the period. No
adjustments are made to reflect any income taxes payable by shareholders on
dividends and distributions paid by the Portfolio.
Average annual total return quotations are computed by finding the average
annual compounded rate of return over the period that would equate the initial
amount invested to the ending redeemable value.
A Portfolio may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
the Portfolio from a given date to a subsequent given date. Cumulative non-
standardized total return is calculated by measuring the value of an initial
investment in a Portfolio at a given time, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each Portfolio.
In addition to total return information, certain Portfolios may also advertise
their current "yield." Yield figures are based on historical earnings and are
not intended to indicate future performance. Yield is determined by analyzing
the Portfolio's net income per share for a 30-day (or one-month) period (which
period will be stated in the advertisement), and dividing by the maximum
offering price per share on the last day of the period. A "bond equivalent"
annualization method is used to reflect a semiannual compounding. Yield
calculations do not take into account expenses at the "wrap" or contractholder
level as expanded in the prospectus. Investors should also review yield
calculations that include those expenses.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by a Portfolio in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
lesser than a Portfolio's then current dividend rate.
A Portfolio's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by a Portfolio, portfolio maturity and a
Portfolio's expenses.
Yield quotations should be considered relative to changes in the net asset
value of a Portfolio's shares, a Portfolio's investment policies, and the risks
of investing in shares of a Portfolio. The investment return and principal value
of an investment in a Portfolio will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The Adviser may, from time to time, waive advisory fees or reimburse a certain
amount of the future ordinary business expenses of a Portfolio. Such
waiver/reimbursement will increase the yield or total return of such Portfolio.
The Adviser may stop waiving fees or reimbursing expenses at any time without
prior notice.
From time to time the Money Market Portfolio advertises its "yield" and
"effective yield." Both yield figures are based on historical earnings and are
not intended to indicate future performance. The "yield" of the Portfolio refers
to the income generated by an investment in the Money Market Portfolio over a
seven-day period (which period will be stated in the advertisement). This income
is then "annualized." That is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the Money
Market Portfolio is assumed to be reinvested. The "effective yield" will be
slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment.
Since yield fluctuates, yield data cannot necessarily be used to compare an
investment in a Portfolio's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is generally a function of the kind and quality of the instrument held in a
portfolio, portfolio maturity, operating expenses and market conditions.
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From time to time, certain Portfolios may include in sales literature and
shareholder reports a quotation of the current "distribution rate" for shares of
such Portfolios. Distribution rate is a measure of the level of income and
short-term capital gain dividends, if any, distributed for a specified period.
Distribution rate differs from yield, which is a measure of the income actually
earned by a Portfolio's investments, and from total return, which is a measure
of the income actually earned by, plus the effect of any realized and unrealized
appreciation or depreciation of, such investments during a stated period.
Distribution rate is, therefore, not intended to be a complete measure of a
Portfolio's performance. Distribution rate may sometimes be greater than yield
since, for instance, it may not include the effect of amortization of bond
premiums, and may include non-recurring short-term capital gains and premiums
from futures transactions engaged in by the Portfolios.
From time to time marketing materials may provide a portfolio manager update,
an adviser update or discuss general economic conditions and outlooks. A
Portfolio's marketing materials may also show the Portfolio's asset class
diversification, top sectors, largest holdings and other Portfolio asset
structures, such as duration, maturity, coupon, NAV, rating breakdown, AMT
exposure and number of issues in the portfolio. Materials may also mention how
the Distributor believes a Portfolio compares relative to other Portfolio's of
the Adviser. Materials may also discuss the Dalbar Financial Services study from
1984 to 1994 which studied investor cash flow into and out of all types of
mutual funds. The ten year study found that investors who bought mutual fund
shares and held such shares outperformed investors who bought and sold. The
Dalbar study conclusions were consistent regardless of if shareholders purchased
their funds in direct or sales force distribution channels. The study showed
that investors working with a professional representative have tended over time
to earn higher returns than those who invested directly. The performance of the
funds purchased by the investors in the Dalbar study and the conclusions based
thereon are not necessarily indicative of future performance of such funds or
conclusions that may result from similar studies in the future. The Portfolios
will also be marketed on the internet.
In reports or other communications to shareholders or in advertising material,
a Portfolio may compare its performance with that of other mutual funds as
listed in the ratings or rankings prepared by Lipper Analytical Services, Inc.,
CDA, Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds, with the Consumer Price Index, the Dow Jones
Industrial Average Index, Standard & Poor's indices, NASDAQ Composite Index,
other appropriate indices of investment securities, or with investment or
savings vehicles. The performance information may also include evaluations of
such Portfolio published by nationally recognized ranking or rating services and
by nationally recognized financial publications. Such comparative performance
information will be stated in the same terms in which the comparative data or
indices are stated. Such advertisements and sales material may also include a
yield quotation as of a current period. In each case, such total return and
yield information, if any, will be calculated pursuant to rules established by
the SEC and will be computed separately for each Portfolio. For these purposes,
the performance of the Portfolios, as well as the performance of other mutual
funds or indices, do not reflect various charges, the inclusion of which would
reduce portfolio performance.
The Portfolios may also utilize performance information in hypothetical
illustrations. For example, the Portfolios may, from time to time: (1)
illustrate the benefits of tax-deferral by comparing taxable investments to
investments made through tax-deferred retirement plans; (2) illustrate in graph
or chart form, or otherwise, the benefits of dollar cost averaging by comparing
investments made pursuant to a systematic investment plan to investments made in
a rising market; (3) illustrate allocations among different types of mutual
funds for investors of different stages of their lives; and (4) in reports or
other communications to shareholders or in advertising material, illustrate the
benefits of compounding at various assumed rates of return.
The Trust's Annual Report and Semiannual Report contain additional performance
information about each of the Trust's portfolios. A copy of the Annual Report or
Semiannual Report may be obtained without charge by calling or writing the Trust
at the telephone number and address printed on the cover of this Statement of
Additional Information.
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MONEY MARKET PORTFOLIO YIELD INFORMATION
The yield of the Money Market Portfolio is its net income expressed in
annualized terms. The Securities and Exchange Commission requires by rule that a
yield quotation set forth in an advertisement for a "money market" fund be
computed by a standardized method based on a historical seven calendar day
period. The standardized yield is computed by determining the net change
(exclusive of realized gains and losses and unrealized appreciation and
depreciation) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period to
obtain the base period return, and multiplying the base period return by 365/7.
The determination of net change in account value reflects the value of
additional shares purchased with dividends from the original share, dividends
declared on both the original share and such additional shares, and all fees
that are charged to all shareholder accounts, in proportion to the length of the
base period and the Portfolio's average account size. The Portfolio may also
calculate its effective yield by compounding the unannualized base period return
(calculated as described above) by adding 1 to the base period return, raising
the sum to a power equal to 365 divided by 7, and subtracting one.
The yield quoted at any time represents the amount being earned on a current
basis for the indicated period and is a function of the types of instruments in
the Portfolio, their quality and length of maturity, and the Portfolio's
operating expenses. The length of maturity for the Portfolio is the average
dollar weighted maturity of the Portfolio. This means that the Portfolio has an
average maturity of a stated number of days for all of its issues. The
calculation is weighted by the relative value of the investment.
The yield fluctuates daily as the income earned on the investments of the
Portfolio fluctuates. Accordingly, there is no assurance that the yield quoted
on any given occasion will remain in effect for any period of time. It should
also be emphasized that the Portfolio is an open-end investment company and that
there is no guarantee that the net asset value will remain constant. A
shareholder's investment in the Portfolio is not insured. Investors comparing
results of the Portfolio with investment results and yields from other sources
such as banks or savings and loan associations should understand this
distinction. The yield quotation may be of limited use for comparative purposes
because it does not reflect charges imposed at the Account level which, if
included, would decrease the yield.
Other portfolios of the money market type as well as banks and savings and
loan associations may calculate their yield on a different basis, and the yield
quoted by the Portfolio could vary upwards or downwards if another method of
calculation or base period were used.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Portfolios and all cash,
including proceeds from the sale of shares of the Portfolios and of securities
in each Portfolio's investment portfolio, are held by State Street Bank and
Trust Company, 225 West Franklin Street, Boston, Massachusetts 02110, as
custodian. With respect to investments in foreign securities, the custodian
enters into agreements with foreign sub-custodians which are approved by the
Board of Trustees pursuant to Rule 17f-5 under the 1940 Act. The custodian and
sub-custodians generally domestically, and frequently abroad, do not actually
hold certificates for the securities in their custody, but instead have book
records with domestic and foreign securities depositories, which in turn have
book records with the transfer agents of the issuers of the securities. The
custodian also provides accounting services to the Portfolios.
SHAREHOLDER REPORTS -- Semiannual statements of the Trust containing information
about each of the Portfolios, are furnished to shareholders, and annually such
statements are audited by the independent accountants whose selection is
ratified annually by shareholders.
INDEPENDENT ACCOUNTANTS -- PricewaterhouseCoopers LLP, 200 East Randolph Drive,
Chicago, Illinois 60601, the independent accountants for the Trust, performs an
annual audit of the Trust's financial statements.
LEGAL COUNSEL -- Skadden, Arps, Slate, Meagher & Flom (Illinois).
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DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S -- A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P) follows:
A S&P corporate or municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the obligor or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of payment -- capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms of
the obligation:
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditor's rights.
1. LONG-TERM DEBT
Investment Grade AAA: Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to meet its financial commitment on the obligation is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only in small degree.
Capacity to meet its financial commitment on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher rated
categories. Capacity to meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to meet its financial commitment on the obligation.
Speculative Grade BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and
"C" are regarded as having significant speculative characteristics. "BB"
indicates the least degree of speculation and "C" the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
BB: Debt rated "BB" is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated "B" is more vulnerable to nonpayment than obligations rated "BB",
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
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CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to nonpayment.
C: Debt rated "C" is currently highly vulnerable to nonpayment. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed or
similar action has been taken, but payments on this obligation are being
continued.
D: Debt rated "D" is in payment default. The "D" rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The "D" rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
r: This symbol highlights derivative, hybrid and certain other obligations that
S&P believes may experience high volatility or high variability in expected
returns as a result of non credit risks. Examples include: obligations linked or
indexed to equities, currencies, or commodities; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
2. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1: This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3: Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having only speculative capacity for timely
payment.
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D: Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the due date, even if
the applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained from other sources it considers reliable. S&P does
not perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
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MOODY'S INVESTORS SERVICE, INC. -- A brief description of the applicable
Moody's Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
1. LONG-TERM DEBT
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payment
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other market shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
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Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date date to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
2. SHORT-TERM DEBT
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
3. PREFERRED STOCK
Preferred stock rating symbols and their definitions are as follows:
aaa: An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
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aa: An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
a: An issue which is rated "a" is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classifications, earnings and asset protections are, nevertheless,
expected to be maintained at adequate levels.
baa: An issue which is rated "baa" is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba: An issue which is rated "ba" is considered to have speculative elements and
its future cannot be considered well assured. Earnings and asset protection may
be very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
b: An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa: An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
ca: An issue which is rated "ca" is speculative in a high degree and is likely
to be in arrears on dividends with little likelihood of eventual payment.
c: This is the lowest rated class of preferred or preference stock. Issues so
rated can thus be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category, the modifier 2 indicates a mid-range
ranking, and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
4. COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (on supporting institutions) have a superior ability
for repayment of short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well established access to a ranges of financial markets and assured
sources of alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
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Issuers rated Prime-3 (or supported institutions) have an acceptable
ability for repayment of short-term debt obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the prime rating
categories.
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