[LOGO]
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(609) 282-4600
FEBRUARY 8, 1999
Dear Shareholder:
The Annual Meeting of Shareholders is to be held at 2:00 p.m. (Eastern
time), on Friday, March 26, 1999, at the offices of Prudential Securities
Incorporated, One Seaport Plaza, 35th Floor, New York, New York. A Proxy
Statement regarding the meeting, a proxy card for your vote at the meeting and
an envelope--postage prepaid--in which to return your proxy are enclosed.
At the Annual Meeting, the holders of the Fund's common stock will elect the
Fund's Class I Directors, the holders of the Fund's preferred stock will vote
separately as a single class to elect two additional Directors, and the holders
of both common and preferred stock will consider the ratification of the
selection of PricewaterhouseCoopers LLP as independent public accountants.
Shareholders will also consider a series of related proposals to amend the
Fund's principal investment objective, investment policies and investment
restrictions to allow the Fund to invest up to 35% of its total assets in Global
Debt Securities. In addition, the shareholders present will hear a report on the
Fund. There will be an opportunity to discuss matters of interest to you as a
shareholder.
Your Directors recommend that you vote in favor of each of the foregoing
matters.
BRIAN M. SHERMAN LAURENCE S. FREEDMAN
CHAIRMAN PRESIDENT
YOU ARE URGED TO SIGN AND MAIL THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE TO
ASSURE A QUORUM AT THE MEETING. THIS IS IMPORTANT REGARDLESS OF THE SIZE OF YOUR
SHAREHOLDING.
THE FIRST COMMONWEALTH FUND, INC.
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MARCH 26, 1999
------------------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of The First
Commonwealth Fund, Inc. (the "Fund") will be held at the offices of Prudential
Securities Incorporated, One Seaport Plaza, 35th Floor, New York, New York, on
Friday, March 26, 1999, at 2:00 p.m. (Eastern time) for the following purposes:
(1) To elect four Directors to serve as Class I Directors for a three year term;
(2) To elect two Directors to represent the interests of the holders of preferred
stock for the ensuing year;
(3) To ratify the selection of PricewaterhouseCoopers LLP as independent public
accountants of the Fund for the fiscal year ending October 31, 1999;
(4)(A) To amend the Fund's investment policies to allow the Fund to invest up to 35%
of its total assets in Global Debt Securities;
(4)(B) To amend the Fund's principal investment objective and investment policies
regarding investments in high grade fixed-income securities;
(4)(C) To amend the Fund's investment policies to allow the Fund to invest up to 15%
of its total assets in debt securities rated, or judged by the Investment
Manager to be, below investment grade at the time of investment;
(4)(D) To amend the Fund's investment policies to allow the Fund to invest in equity
securities issued by certain U.S. registered investment companies; and
(4)(E) To amend the Fund's investment policies and investment restrictions to allow
the Fund to use derivatives.
The Board of Directors has fixed the close of business on January 26, 1999
as the record date for the determination of shareholders entitled to vote at the
meeting or any adjournment or postponement thereof. The appointed proxies will
vote in their discretion on any other business as may properly come before the
meeting or any adjournments or postponements thereof.
In the event that the necessary quorum to transact business or the vote
required to approve or reject any proposal is not obtained at the meeting, the
persons named as proxies may propose one or more adjournments of the meeting, in
accordance with applicable law, to permit further solicitation of proxies. Any
such adjournment will require the affirmative vote of the holders of a majority
of the Fund's shares present in person or by proxy at the meeting. The persons
named as proxies will vote in favor of such adjournment those proxies which they
are entitled to vote in favor and will vote against any such adjournment those
proxies to be voted against that proposal.
By Order of the Board of Directors,
Roy M. Randall, SECRETARY
Plainsboro, New Jersey
February 8, 1999
IMPORTANT: YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. SHAREHOLDERS WHO DO
NOT EXPECT TO ATTEND THE MEETING IN PERSON ARE REQUESTED TO COMPLETE, DATE AND
SIGN THE ENCLOSED FORM OF PROXY AND RETURN IT PROMPTLY IN THE ADDRESSED ENVELOPE
WHICH REQUIRES NO POSTAGE AND IS INTENDED FOR YOUR CONVENIENCE. YOUR PROMPT
RETURN OF THE ENCLOSED PROXY MAY SAVE THE FUND THE NECESSITY AND EXPENSE OF
FURTHER SOLICITATIONS TO ASSURE A QUORUM AT THE MEETING. THE ENCLOSED PROXY IS
BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE FUND.
PROXY STATEMENT
THE FIRST COMMONWEALTH FUND, INC.
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
------------------------
ANNUAL MEETING OF SHAREHOLDERS
MARCH 26, 1999
---------------------
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of The First Commonwealth Fund,
Inc., a Maryland corporation (the "Fund"), to be voted at the Annual Meeting of
Shareholders of the Fund (the "Meeting") to be held at the offices of Prudential
Securities Incorporated, One Seaport Plaza, 35th Floor, New York, New York, on
Friday, March 26, 1999, at 2:00 p.m. (Eastern time). The approximate mailing
date for this Proxy Statement is February 12, 1999 or as soon as practicable
thereafter.
All properly executed proxies received prior to the Meeting will be voted at
the Meeting in accordance with the instructions marked on the proxy card. Unless
instructions to the contrary are marked, proxies submitted by holders of the
Fund's common stock will be voted IN FAVOR of Proposals 1, 3, 4(A), 4(B), 4(C),
4(D) and 4(E) and proxies submitted by holders of the Fund's preferred stock
will be voted IN FAVOR of Proposals 2, 3, 4(A), 4(B), 4(C), 4(D) and 4(E). Any
proxy may be revoked at any time prior to its exercise by giving written notice
to the Secretary of the Fund (addressed to the Secretary at the principal
executive office of the Fund, 800 Scudders Mill Road, Plainsboro, New Jersey
08536).
The following table indicates which class of the Fund's shareholders is
being solicited with respect to each Proposal to be considered at the Meeting.
SOLICITATION OF
SOLICITATION OF VOTE
VOTE OF PREFERRED
OF COMMON STOCKHOLDERS
STOCKHOLDERS (SERIES W-7)
----------------- -----------------
PROPOSAL 1:
Election of Class I Directors.............................................. Yes No
PROPOSAL 2:
Election of Preferred Directors............................................ No Yes
PROPOSAL 3:
Selection of Independent Public Accountants................................ Yes Yes
PROPOSAL 4(A):
Amendments to the Fund's Investment Policies to Allow the Fund to Invest up
to 35% of its Total Assets in Global
Debt Securities........................................................... Yes Yes
1
SOLICITATION OF
SOLICITATION OF VOTE
VOTE OF PREFERRED
OF COMMON STOCKHOLDERS
STOCKHOLDERS (SERIES W-7)
----------------- -----------------
PROPOSAL 4(B):
Amendments to the Fund's Principal Investment Objective and Investment
Policies Regarding Investments in High Grade Fixed-Income Securities...... Yes Yes
PROPOSAL 4(C)
Amendment to the Fund's Investment Policies to Allow the Fund to Invest up
to 15% of its Total Assets in Debt Securities Rated, or Judged by the
Investment Manager to be, Below Investment Grade at the Time of
Investment................................................................ Yes Yes
PROPOSAL 4(D):
Amendment to the Fund's Investment Policies to Allow the Fund to Invest in
Equity Securities Issued by Certain U.S. Registered Investment
Companies................................................................. Yes Yes
PROPOSAL 4(E):
Amendments to the Fund's Investment Policies and Investment Restrictions to
Allow the Fund to Use Derivatives......................................... Yes Yes
The Board of Directors has fixed the close of business on January 26, 1999
as the record date for the determination of shareholders entitled to notice of
and to vote at the Meeting and at any adjournment or postponement thereof.
Shareholders on the record date will be entitled to one vote for each share
held. As of January 26, 1999, the Fund had outstanding 9,266,209 shares of
common stock, par value $0.001 per share and 1,200 shares of Auction Market
Preferred Stock, Series W-7, par value $0.001 per share. To the best knowledge
of management of the Fund, as of the record date, no persons or group
beneficially owned more than five percent of the outstanding shares of common or
preferred stock of the Fund.
The Board of Directors of the Fund knows of no business other than that
mentioned in the Notice of the Meeting which will be presented for consideration
at the Meeting. If any other matter is properly presented, it is the intention
of the persons named in the enclosed proxy to vote in accordance with their best
judgment.
THE FUND WILL FURNISH, WITHOUT CHARGE, A COPY OF THE FUND'S ANNUAL REPORT
FOR ITS FISCAL YEAR ENDED OCTOBER 31, 1998, AND ANY MORE RECENT REPORTS, TO ANY
FUND SHAREHOLDER UPON REQUEST. TO REQUEST A COPY, PLEASE CALL OR WRITE TO THE
FUND'S ADMINISTRATOR, PRINCETON ADMINISTRATORS, L.P., AT 800 SCUDDERS MILL ROAD,
PLAINSBORO, NEW JERSEY 08536, TELEPHONE: 1-800-543-6217.
PROPOSAL 1: ELECTION OF CLASS I DIRECTORS
The Fund's Articles of Incorporation provide that the Board of Directors to
be elected by holders of the Fund's common stock will be divided into three
classes, as nearly equal in number as possible, each of which, after a
transition period, will serve for three years with one class being elected each
year. Each year the term of office of one class will expire. David L. Elsum,
Laurence S. Freedman, David Manor and E. Duff Scott, Directors who were elected
to serve until the Meeting, have been nominated for a three year term to expire
at the Annual Meeting of Shareholders to be held in 2002 and until their
successors are duly
2
elected and qualified. The nominees have indicated an intention to serve if
elected and have consented to be named in this Proxy Statement.
It is the intention of the persons named in the enclosed proxy to vote in
favor of the election of the persons listed below under Class I for a three-year
term. The Board of Directors of the Fund knows of no reason why any of these
nominees will be unable to serve, but in the event of any such inability, the
proxies received will be voted for such substituted nominees as the Board of
Directors may recommend.
The following table sets forth certain information concerning each nominee
for election as a Director and each Director of the Fund. Each of the nominees
is currently a Director of the Fund.
SHARES OF
COMMON STOCK
BENEFICIALLY
OWNED AND %
PRESENT OFFICE WITH THE FUND, OF TOTAL
NAME AND ADDRESS PRINCIPAL OCCUPATION OR DIRECTOR OUTSTANDING
OF EACH DIRECTOR OR NOMINEE EMPLOYMENT AND DIRECTORSHIPS AGE SINCE ON 10/31/98 (1)
- --------------------------------------- ---------------------------------------- --- ----------- -----------------
CLASS I (CURRENT DIRECTORS AND NOMINEES FOR A TERM EXPIRING AT THE ANNUAL MEETING TO BE HELD IN 2002)
David Lindsay Elsum, A.M.++ Director, The First Australia Fund, Inc. 61 1992 --
9 May Grove (since 1985), The First Australia Prime
South Yarra, Victoria 3141 Income Fund, Inc. (since 1986) and
Australia First Australia Prime Income Investment
Company Limited (since 1986); Director,
MaxiLink Limited; Chairman, Audit
Victoria; Chairman, Melbourne Wholesale
Fish Market Ltd.; Chairman, Queen
Victoria Market; Chairman, Stodart
Investment Pty. Ltd.; Director, First
Resources Development Fund Limited;
Director, Stateguard Friendly Society;
Member, Corporations and Securities
Panel of the Australian Securities and
Investments Commission; Member, Federal
Administrative Appeals Tribunal;
Adviser, TASA International Executive
Search; Chairman, Health Computing
Services Limited (1990-1996); Director,
IlTec Limited (1993-1996); President,
State Superannuation Fund of Victoria
(1986-1993).
3
SHARES OF
COMMON STOCK
BENEFICIALLY
OWNED AND %
PRESENT OFFICE WITH THE FUND, OF TOTAL
NAME AND ADDRESS PRINCIPAL OCCUPATION OR DIRECTOR OUTSTANDING
OF EACH DIRECTOR OR NOMINEE EMPLOYMENT AND DIRECTORSHIPS AGE SINCE ON 10/31/98 (1)
- --------------------------------------- ---------------------------------------- --- ----------- -----------------
Laurence S. Freedman* President of the Fund (since 1992); Vice 55 1992 --
Level 3 President and Director (since 1985) and
190 George Street Chairman (since 1995), The First
Sydney, N.S.W. 2000 Australia Fund, Inc.; Vice President
Australia and Director (since 1986) and Chairman
(since 1995), The First Australia Prime
Income Fund, Inc.; Joint Managing
Director, First Australia Prime Income
Investment Company Limited (since
1986); Founder and Joint Managing
Director, EquitiLink Australia Limited
(since 1981); Director, EquitiLink
Limited (since 1986); Director,
EquitiLink Holdings Limited (since
1998); Director, EquitiLink
International Management Limited (since
1985); Chairman and Joint Managing
Director, MaxiLink Limited (since
1987); Chairman and Joint Managing
Director, First Resources Development
Fund Limited (since 1994); Managing
Director, Link Enterprises
(International) Pty. Limited
(investment management company) (since
1980); Director, Ten Group Pty. Limited
(since 1994); Director, Ten Network
Holdings Limited (since 1998).
4
SHARES OF
COMMON STOCK
BENEFICIALLY
OWNED AND %
PRESENT OFFICE WITH THE FUND, OF TOTAL
NAME AND ADDRESS PRINCIPAL OCCUPATION OR DIRECTOR OUTSTANDING
OF EACH DIRECTOR OR NOMINEE EMPLOYMENT AND DIRECTORSHIPS AGE SINCE ON 10/31/98 (1)
- --------------------------------------- ---------------------------------------- --- ----------- -----------------
David Manor* Treasurer of the Fund; Director and 58 1992 --
P. O. Box 578 Treasurer, The First Australia Prime
17 Bond Street Income Fund, Inc. (since 1988);
St. Helier, Jersey Treasurer, The First Australia Fund,
Channel Islands JE4 5XB Inc. and First Australia Prime Income
Investment Company Limited; Executive
Director, EquitiLink Australia Limited
and EquitiLink Limited (1986-1998);
Director, EquitiLink International
Management Limited (since 1987).
E. Duff Scott+ Director, First Australia Prime Income 62 1992 --
8 Sunnydene Circle Investment Company Limited (since
Toronto, Ontario M4N 3J6 1989); President, Multibanc Financial
Canada Corporation and Multibanc NT Financial
Corporation (investment holding
companies) (since 1990); Chairman,
Peoples Jewelers Corporation (retail
jeweler) (since 1993); Chairman, QLT
Phototherapeutics (biopharmaceuticals)
(since 1991); Chairman,
Prudential-Bache Securities Canada
(investment banking) (1988-1990);
Chairman, The Toronto Stock Exchange
(1987-1989).
5
SHARES OF
COMMON STOCK
BENEFICIALLY
OWNED AND %
PRESENT OFFICE WITH THE FUND, OF TOTAL
NAME AND ADDRESS PRINCIPAL OCCUPATION OR DIRECTOR OUTSTANDING
OF EACH DIRECTOR OR NOMINEE EMPLOYMENT AND DIRECTORSHIPS AGE SINCE ON 10/31/98 (1)
- --------------------------------------- ---------------------------------------- --- ----------- -----------------
CLASS II (TERM EXPIRING AT THE ANNUAL MEETING TO BE HELD IN 2000)
Rt. Hon. Malcolm Fraser, A.C., C.H.+ Director, The First Australia Fund, Inc. 68 1992 --
44/55 Collins Street (since 1985), The First Australia Prime
Melbourne, Victoria 3000 Income Fund, Inc. (since 1986) and
Australia First Australia Prime Income Investment
Company Limited (since 1986);
International Consultant on Political,
Economic and Strategic Affairs (since
1983); InterAction Council for Former
Heads of Government (since 1987,
Chairman since 1997); Chairman, CARE
Australia (since 1987); Consultant, The
Prudential Insurance Company of
America; Partner, Nareen Pastoral
Company (agriculture) (until 1998);
President, CARE International
(1990-1995); Parliamentarian-Prime
Minister of Australia (1975-1983).
6
SHARES OF
COMMON STOCK
BENEFICIALLY
OWNED AND %
PRESENT OFFICE WITH THE FUND, OF TOTAL
NAME AND ADDRESS PRINCIPAL OCCUPATION OR DIRECTOR OUTSTANDING
OF EACH DIRECTOR OR NOMINEE EMPLOYMENT AND DIRECTORSHIPS AGE SINCE ON 10/31/98 (1)
- --------------------------------------- ---------------------------------------- --- ----------- -----------------
William J. Potter+++ Director, The First Australia Fund, Inc. 50 1992 --
236 West 27(th) Street (since 1985), The First Australia Prime
New York, NY 10001 Income Fund, Inc. (since 1986) and
First Australia Prime Income Investment
Company Limited (since 1986);
President, Ridgewood Group
International Ltd. (investment banking)
(since 1989); Director, Ridgewood
Capital Funding, Inc. (NASD); Director
and Chairman of Finance, National
Foreign Trade Association (USA);
Director, Alexandria Bancorp (banking
group in Cayman Islands); Director,
Alexandria Bancorp Limited; Director,
Canadian Health Foundation; Director,
Columbus Mills Ltd.; Director, E.C.
Power, Inc.; Director, Finanz
Interlaken A.G. (Swiss); Director,
Impulsora del Fondo Mexico; Director,
International Panorama Resources Ltd.;
Consultant, Trieste Futures Exchange,
Inc.; Partner, Sphere Capital Partners
(corporate consulting) (1989-1997);
Managing Director, Prudential-Bache
Securities Inc. (1984-1989); First Vice
President, Barclays Bank, plc
(1982-1984); previously, various
positions with Toronto Dominion Bank.
7
SHARES OF
COMMON STOCK
BENEFICIALLY
OWNED AND %
PRESENT OFFICE WITH THE FUND, OF TOTAL
NAME AND ADDRESS PRINCIPAL OCCUPATION OR DIRECTOR OUTSTANDING
OF EACH DIRECTOR OR NOMINEE EMPLOYMENT AND DIRECTORSHIPS AGE SINCE ON 10/31/98 (1)
- --------------------------------------- ---------------------------------------- --- ----------- -----------------
Peter D. Sacks++ Director, The First Australia Fund, Inc. 53 1992 --
33 Yonge Street (since December 1998); Director, The
Suite 706 First Australia Prime Income Fund, Inc.
Toronto, Ontario M5E 1G4 (since 1993); Director, First Australia
Canada Prime Income Investment Company Limited
(since December 1998); President and
Director, Toron Capital Markets, Inc.
(currency, interest rate and commodity
risk management) (since 1988);
Director, Toron Capital Management Ltd.
(commodity trading adviser) (since
1994); President and Director, Toron
Asset Management Inc. (portfolio
management) (since 1998); Director,
First Horizons Holdings Limited.
8
SHARES OF
COMMON STOCK
BENEFICIALLY
OWNED AND %
PRESENT OFFICE WITH THE FUND, OF TOTAL
NAME AND ADDRESS PRINCIPAL OCCUPATION OR DIRECTOR OUTSTANDING
OF EACH DIRECTOR OR NOMINEE EMPLOYMENT AND DIRECTORSHIPS AGE SINCE ON 10/31/98 (1)
- --------------------------------------- ---------------------------------------- --- ----------- -----------------
Brian M. Sherman* Vice President (since 1992) and Chairman 55 1992 --
Level 3 (since 1995) of the Fund; President and
190 George Street Director, The First Australia Fund,
Sydney, N.S.W. 2000 Inc. (since 1985) and The First
Australia Australia Prime Income Fund, Inc.
(since 1986); Joint Managing Director
(since 1986) and Chairman (since 1995),
First Australia Prime Income Investment
Company Limited; Chairman, EquitiLink
Limited (since 1986); Chairman and
Joint Managing Director, EquitiLink
Australia Limited (since 1981);
Chairman and Director, EquitiLink
Holdings Limited (since 1998);
Director, EquitiLink International
Management Limited (since 1985); Joint
Managing Director, MaxiLink Limited
(since 1987); Joint Managing Director,
First Resources Development Fund
Limited (since 1994); Director, Ten
Group Pty. Limited (since 1994);
Director, Ten Network Holdings Limited
(since 1998); Director, Sydney
Organizing Committee for the Olympic
Games.
9
SHARES OF
COMMON STOCK
BENEFICIALLY
OWNED AND %
PRESENT OFFICE WITH THE FUND, OF TOTAL
NAME AND ADDRESS PRINCIPAL OCCUPATION OR DIRECTOR OUTSTANDING
OF EACH DIRECTOR OR NOMINEE EMPLOYMENT AND DIRECTORSHIPS AGE SINCE ON 10/31/98 (1)
- --------------------------------------- ---------------------------------------- --- ----------- -----------------
CLASS III (TERM EXPIRING AT THE ANNUAL MEETING TO BE HELD IN 2001)
Sir Roden Cutler, V.C., A.K., K.C.M.G., Chairman (1985-1995) and Director (since 82 1992 --
K.C.V.O., C.B.E., K.St.J. 1985), The First Australia Fund, Inc.;
442 Edgecliff Road Chairman (1986-1995) and Director
Edgecliff, N.S.W. 2027 (since 1986), The First Australia Prime
Australia Income Fund, Inc. and First Australia
Prime Income Investment Company
Limited; Australia Director, Rothmans
Holding Ltd. (formerly Rothmans Pall
Mall) (tobacco) (1981-1994); Chairman,
State Bank of New South Wales
(1981-1986); Governor of New South
Wales, Australia (1966-1981).
Michael Gleeson-White, A.O.* Director, First Australia Prime Income 73 1992 --
9A Wellington Street Investment Company Limited (since
Woollahra, N.S.W. 2025 1986); Director, MaxiLink Limited
Australia (since 1987); Deputy Chairman, Art
Gallery of New South Wales Foundation;
Director, Cleveland Shopping Centre
Pty. Ltd.; Consultant, EquitiLink
Limited (1990-1996); Chairman, Bank of
Singapore (Australia) Limited
(1987-1990).
10
SHARES OF
COMMON STOCK
BENEFICIALLY
OWNED AND %
PRESENT OFFICE WITH THE FUND, OF TOTAL
NAME AND ADDRESS PRINCIPAL OCCUPATION OR DIRECTOR OUTSTANDING
OF EACH DIRECTOR OR NOMINEE EMPLOYMENT AND DIRECTORSHIPS AGE SINCE ON 10/31/98 (1)
- --------------------------------------- ---------------------------------------- --- ----------- -----------------
John T. Sheehy++ Director, The First Australia Fund, Inc. 56 1992 --
2700 Garden Road (since 1985), The First Australia Prime
Suite G Income Fund, Inc. (since 1986) and
Monterey, CA 93940 First Australia Prime Income Investment
Company Limited (since 1986); Managing
Director, Black & Company
(broker-dealer and investment bankers);
Managing Director, The Value Group LLC
(merchant banking) (since 1997);
Director, Greater Pacific Food
Holdings, Inc. (food industry
investment company) (since 1993);
Director, Video City, Inc. (video
retail merchandising); Director, Sphere
Capital Advisors (investment adviser);
Partner, Sphere Capital Partners
(corporate consulting) (since 1987);
Director, Sandy Corporation (corporate
consulting, communication and training)
(1986-January 1996).
Warren C. Smith Director, First Australia Prime Income 43 1992 --
1002 Sherbrooke St. West Investment Company Limited (since
Suite 1600 1993); Managing Editor, BCA
Montreal, Quebec H3A 3L6 Publications Ltd. (financial
Canada publications, including The Bank Credit
Analyst) (since 1982).
- ------------------------
* Directors considered by the Fund and its counsel to be persons who are
"interested persons" (which as used in this Proxy Statement is as defined in
the Investment Company Act of 1940, as amended) of the Fund or of the Fund's
investment manager or investment adviser. Messrs. Freedman, Sherman and
Manor are deemed to be interested persons because of their affiliation with
the Fund's investment manager and investment adviser, or because they are
officers of the Fund or both. Mr. Gleeson-White was considered an interested
director because of his affiliation with the Fund's investment adviser until
August 12, 1998 when he sold his remaining interest in the direct parent of
the investment adviser. See "Further Information Regarding Directors and
Officers--Relationship of Directors or Nominees with the Investment Adviser
and the Investment Manager."
(FOOTNOTES CONTINUED ON NEXT PAGE)
11
+ Messrs. Fraser, Potter and Scott are members of the Audit Committee.
++ Messrs. Elsum, Potter, Sacks and Sheehy are members of the Contract Review
Committee.
(1) The information as to beneficial ownership is based on statements furnished
to the Fund by the Directors and nominees. As of October 31, 1998, the
Directors listed above as a group owned no shares of the Fund's common or
preferred stock.
Please also see the information contained below under the heading "Further
Information Regarding Directors and Officers."
THE BOARD OF DIRECTORS RECOMMENDS THAT HOLDERS OF COMMON STOCK VOTE FOR THE
ELECTION OF THE FOUR CLASS I NOMINEES TO THE FUND'S BOARD OF DIRECTORS.
PROPOSAL 2: ELECTION OF PREFERRED DIRECTORS
The Fund has outstanding 1,200 shares of Auction Market Preferred Stock,
Series W-7, with an aggregate liquidation preference of $30,000,000.
Section 18 of the Investment Company Act of 1940, as amended (the "1940
Act"), requires that the holders of any preferred shares, voting separately as a
single class without regard to series, have the right to elect at least two
Directors at all times. Dr. Anton E. Schrafl and Michael R. Horsburgh have been
nominated to fill the two preferred stock Board seats and to represent
exclusively the holders of all series of the Fund's preferred stock (the
"Preferred Directors") and to serve as Preferred Directors until the Annual
Meeting of Shareholders to be held in 2000. Dr. Schrafl is currently a Preferred
Director and Mr. Horsburgh is a Class I Director. The nominees have indicated an
intention to serve if elected and have consented to be named in this Proxy
Statement.
It is the intention of the persons named in the enclosed proxy to vote in
favor of the election of the persons listed below. The Board of Directors of the
Fund knows of no reason why either of these nominees will be unable to serve,
but in the event of any such inability, the proxies received will be voted for
such substituted nominees as the Board of Directors may recommend.
12
The following table sets forth certain biographical information concerning
each of the nominees as a Preferred Director of the Fund.
SHARES OF
COMMON STOCK
BENEFICIALLY
OWNED AND %
PRESENT OFFICE WITH THE FUND, OF TOTAL
NAME AND ADDRESS PRINCIPAL OCCUPATION OR DIRECTOR OUTSTANDING
OF EACH DIRECTOR OR NOMINEE EMPLOYMENT AND DIRECTORSHIPS AGE SINCE ON 10/31/98 (1)
- --------------------------------------- ---------------------------------------- --- ----------- ---------------
Dr. Anton E. Schrafl Director, The First Australia Prime 66 1993 --
Talstrasse 83 Income Fund, Inc. (since December
CH-8001 Zurich 1998); Director, First Australia Prime
Switzerland Income Investment Company Limited;
Deputy Chairman, "Holderbank"
Financiere Glaris A.G. (mfg. cement and
allied materials); Director,
Organogenesis, Inc.
Michael R. Horsburgh Director, The First Australia Fund, Inc. 53 1994 --
21,22/FI Ssang Yong Tower (since 1985); Director, The First
23-2 Yuido-dong Australia Prime Income Fund, Inc.
Youngdungpo-gu, (since 1986); Executive Vice President,
Seoul 150-010, Korea Hannuri Securities & Investment (since
October 1997); Director, The First
Hungary Fund; Director and Managing
Director, Carlson Investment
Management, Inc. (1991-October 1997);
Director and Chief Executive Officer,
Horsburgh Carlson Investment
Management, Inc. (1991-1996); Managing
Director, Barclays de Zoete Wedd
Investment Management (U.S.A.)
(1990-1991); Special Associate
Director, Bear, Stearns & Co. Inc.
(1989-1990); Senior Managing Director,
Bear, Stearns & Co. Inc. (1985-1989);
General Partner, Bear, Stearns & Co.
Inc. (1981-1985); previously, Limited
Partner, Bear, Stearns & Co. Inc.
- ------------------------
(1) As of October 31, 1998, the Preferred Directors of the Fund as a group owned
no shares of the Fund's common or preferred stock.
13
Please also see the information contained below under the heading "Further
Information Regarding Directors and Officers."
THE BOARD OF DIRECTORS RECOMMENDS THAT HOLDERS OF PREFERRED STOCK VOTE FOR
THE ELECTION OF THE TWO NOMINEES AS PREFERRED DIRECTORS TO THE FUND'S BOARD OF
DIRECTORS.
PROPOSAL 3: SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors of the Fund, including a majority of the Directors
who are not interested persons of the Fund, has selected PricewaterhouseCoopers
LLP, independent public accountants, to examine the financial statements of the
Fund for the fiscal year ending October 31, 1999. This appointment is subject to
ratification or rejection by the shareholders of the Fund.
Audit services performed by PricewaterhouseCoopers LLP during the most
recent fiscal year included examination of the financial statements of the Fund,
services related to filings with the Securities and Exchange Commission and
consultation on matters performed by the firm related to the preparation and
filing of tax returns. The Fund knows of no direct or indirect financial
interest of PricewaterhouseCoopers LLP in the Fund.
Representatives of PricewaterhouseCoopers LLP are expected to be present at
the Meeting and will have the opportunity to respond to questions from
shareholders and to make a statement if they so desire.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR RATIFICATION OF
THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT PUBLIC ACCOUNTANTS
FOR THE FISCAL YEAR ENDING OCTOBER 31, 1999.
PROPOSAL 4: AMENDMENT OF THE FUND'S PRINCIPAL INVESTMENT OBJECTIVE,
INVESTMENT POLICIES AND INVESTMENT RESTRICTIONS
BOARD RECOMMENDATION
At a meeting of the Board held on December 15, 1998, the Fund's Investment
Manager and Investment Adviser (together, "EquitiLink") proposed that the Fund's
principal investment objective, investment policies and investment restrictions
be expanded to enable the Fund to invest up to 35% of its total assets in Global
Debt Securities (the "Proposal"). The Proposal reflected the culmination of
several months of internal evaluation at EquitiLink as to the Fund's future in a
setting in which low inflation, declining interest rates and a moderate economic
environment is expected to prevail in Australia, Canada, New Zealand and the
United Kingdom, as well as in other Group of 7 (G7) markets (i.e., France, the
United States, Germany, Japan and Italy). Although the Fund would continue to
invest at least 65% of its total assets in securities denominated in the
Australian Dollar, the Canadian Dollar, the New Zealand Dollar, the Pound
Sterling or any successor currency (the "Commonwealth Currencies"), investment
of a portion of the Fund's portfolio in Global Debt Securities is believed by
EquitiLink to offer the opportunity to achieve greater diversification and scope
for capital gains, as well as higher yields compared with interest rates
prevailing in Australia, Canada, New Zealand and the United Kingdom. Related
proposals, as discussed more completely below, would reduce the average quality
of its portfolio to A or better and permit the Fund to invest a portion of its
assets in below investment grade debt securities, to use derivatives to manage
currency and interest rate risk, as well as replicate or substitute for physical
securities, and to invest in the securities of other investment companies that
themselves invest in Global Debt Securities. For purposes of this proxy
statement, the term "Global Debt Securities" includes
14
securities of issuers located in, or securities denominated in the currency of,
countries other than Australia, Canada, New Zealand or the United Kingdom.
"Physical securities" means bonds, bills, cash and foreign exchange securities.
AFTER DISCUSSION, BY THE UNANIMOUS VOTE OF THE INDEPENDENT DIRECTORS, AS
WELL AS THE UNANIMOUS VOTE OF THE FULL BOARD, THE BOARD DETERMINED TO RECOMMEND
TO THE FUND'S SHAREHOLDERS THAT THE FUND'S PRINCIPAL INVESTMENT OBJECTIVE,
INVESTMENT POLICIES AND INVESTMENT RESTRICTIONS BE AMENDED IN ORDER TO ENABLE
THE FUND TO INVEST UP TO 35% OF ITS TOTAL ASSETS IN GLOBAL DEBT SECURITIES.
RELATED ASPECTS OF THE PROPOSAL
As part of the proposal, EquitiLink has proposed that the Fund modify its
investment objective, which currently requires that at least 75% of the Fund's
investments be rated high quality at the time of investment, or if unrated,
judged by the Investment Manager to be of equivalent quality. The proposed
modification would provide that the market value weighted average credit quality
of the Fund's investments must be A or better at all times. See Proposal 4(B)
below. Bonds rated AAA or AA are considered high quality. S&P defines an A
rating as: "Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in the higher rated
categories." Moody's defines an A rating as: "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 sometime in the future."
EquitiLink has also proposed that the Fund be permitted to invest up to 15%
of its total assets in debt securities rated below investment grade at the time
of investment, but not less than B- or if not rated, judged by the Investment
Manager to be of comparable quality. See Proposal 4(C) below. In the event that
any of the Fund's investments subsequently fall below B- the Fund will dispose
of them in an orderly fashion. If the Proposal is approved, the Fund could
invest in below investment grade debt securities across the entire portfolio,
including securities denominated in Commonwealth Currencies. In the opinion of
EquitiLink, this will give the Fund greater range to purchase higher yielding
instruments available both within the Commonwealth countries as well as in other
global markets. It will also facilitate investment in emerging markets where
credit ratings are more likely to be lower than investment grade.
EquitiLink has also proposed that the Fund be permitted to invest a portion
of its assets in the equity securities of other investment companies that are
registered under the 1940 Act and that are themselves invested primarily in
fixed-income securities. This will permit the Fund to take advantage of the
particular expertise of other funds that concentrate in a global debt sector.
See Proposal 4(D) below. The Fund intends to limit its investments so that, as
determined immediately after a securities purchase is made: (i) not more than 5%
of the value of its total assets will be invested in the securities of any one
investment company; (ii) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (iii) not more than 3% in the aggregate of the outstanding voting stock of
any one investment company will be owned by the Fund. In addition, in the case
of investments in closed-end funds registered under the 1940 Act, not more than
10% of the total outstanding voting stock of the closed-end fund will be owned
by the Fund and any other fund having the same investment manager or adviser. As
a shareholder of another investment company, the Fund would
15
bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the advisory and other expenses that a Fund bears in connection
with its own operations.
With respect to the portion of the portfolio not denominated in a
Commonwealth Currency, EquitiLink has proposed that the Fund be permitted to use
derivatives to manage both currency and interest rate risk and to replicate, or
substitute for, physical securities in order to achieve transactional
efficiencies. With respect to investments denominated in Commonwealth
Currencies, derivatives could only be used to manage interest rate risk. See
Proposal 4(E) below.
Appendix A discusses the risks involved with investing in higher yielding
securities, the risks involved in global investment, risks associated with
derivatives, and its management of risk from derivatives and its management of
credit risk, as well as EquitiLink's review of structural changes in the
Commonwealth bond markets. Appendix B describes S&P and Moody's ratings systems.
These related aspects of the Proposal require a vote of the shareholders
separate from the vote allowing the Fund to invest a portion of its assets in
Global Debt Securities. However, Proposal 4(A) cannot be fully or properly
implemented if Proposals 4(B), 4(C), 4(D) and 4(E) are not also approved. As a
result, unless all five parts of Proposal 4 are approved by shareholders,
EquitiLink will not implement any portion of Proposal 4 which is approved by
shareholders.
BOARD CONSIDERATIONS
In considering whether to recommend to shareholders that the Fund's
principal investment objective, investment policies and investment restrictions
be amended to permit investment of up to 35% of the Fund's total assets in
Global Debt Securities and, in that connection, to permit the Fund to invest a
portion of its assets in below investment grade securities and reduce the
average quality of its portfolio, as well as to use derivatives, the Board
considered the risks involved.
The Board took into account that investment in certain global debt markets,
especially in emerging markets, may expose the Fund to greater interest rate
risk, foreign exchange risk, credit risk, political and economic risk ("event
risk") and liquidity risk, than is currently the case. These risks, as well as
risks associated with less transparent accounting and auditing standards and
less developed legal systems, can, the Board recognized, increase the likelihood
that losses in net asset value may more than offset the positive effect of
higher apparent yields in these markets. In addition, the Board noted that the
Fund's total investment return may be expected to become more volatile, and that
the Fund's $30 million outstanding Auction Market Preferred Stock could
exacerbate this increased volatility.
The Board took into account that no more than 35% of the Fund's total assets
could be exposed to global debt markets, other than Australia, Canada, New
Zealand and the United Kingdom, and that EquitiLink would seek to mitigate risk
through an active management style operating within pre-set risk limits. It also
considered the fact that investors who do not wish to assume the greater risk
associated with global investments would be able to sell their holdings to
investors who seek higher yields, while accepting the concomitant increase in
risk.
The Board noted that at the Fund's inception in 1992, interest rates in the
Commonwealth Countries were then higher than interest rates prevailing in the
United States but that in more recent years improving economic fundamentals in
the Commonwealth Countries, including lower inflation budget deficit containment
and lower unemployment rates, have served to narrow or eliminate the favorable
spread over U.S.
16
bond rates. Expanding the Fund's investment policies to include investment in
Global Debt Securities in markets with interest rates currently significantly
higher than prevailing rates in the United States, and in lower quality bonds
which generally offer higher yields, could provide a means of improving the
Fund's return.
The Board also noted that Equitilink indicated that, in light of the
prevailing uncertainties in global markets, it proposes to implement the new
strategy in two phases if it is approved by shareholders. Phase One would
involve, upon shareholder approval, immediately investing up to 20% of the
Fund's assets in Asian debt markets which EquitiLink believes currently
represent the most attractive sector because the reward is believed to be
commensurate with the risk. Phase One investments would be made through the
selective sale of existing securities and the reinvestment of the proceeds of
maturing securities. Phase Two could involve investment into global markets
outside Asia and the four Commonwealth countries, as well as investment in other
investment companies registered under the 1940 Act if believed justified by
EquitiLink and the Board. EquitiLink has advised that it currently believes that
Phase Two would be implemented most probably with the proceeds of a rights
offering.
The Fund's current principal investment objective is high current income by
investing in high grade fixed-income securities denominated in the Commonwealth
Currencies. As a secondary investment objective, the Fund seeks capital
appreciation, but only when consistent with its principal investment objective.
However, permitting the Fund to invest up to 35% of its total assets in Global
Debt Securities will require amendments to the Fund's principal investment
objective, as well as certain investment policies and investment restrictions
which require shareholder approval.
PROPOSAL 4(A): AMENDMENTS TO THE FUND'S INVESTMENT POLICIES TO ALLOW
THE FUND TO INVEST UP TO 35% OF ITS TOTAL ASSETS IN GLOBAL DEBT SECURITIES.
The Board of Directors has approved, subject to approval by the
shareholders, changes in certain of the Fund's investment policies which would
allow the Fund to invest up to 35% of its total assets in Global Debt
Securities.
It is proposed that the portion of the Fund's investment policies which now
reads:
"Except in anticipation of dividend or other payments to be made in U.S.
dollars, it is expected that normally all of the Fund's assets will be
invested in a portfolio of debt securities denominated in the Commonwealth
Currencies, namely, the Australian Dollar, the Canadian Dollar, the New
Zealand Dollar and the Pound Sterling or any successor currency."
be amended to read as set forth below:
"Except in anticipation of dividend or other payments to be made in U.S.
dollars, it is expected that normally at least 65% of the Fund's total
assets will be invested in a portfolio of debt securities denominated in the
Commonwealth Currencies, namely, the Australian Dollar, the Canadian Dollar,
the New Zealand Dollar and the Pound Sterling or any successor currency."
and that the following paragraph be added:
"The Fund may invest the balance of its assets (1) in the securities of
Developed Market and/or Emerging Market issuers, including securities issued
by Developed Market or Emerging Market governmental entities, as well as by
banks, companies and other entities which are located in Developed Market or
Emerging Market countries, whether or not denominated in the currency of the
17
Developed Market or Emerging Market country, and (2) in debt securities of
other issuers, denominated in, or linked to, the currency of a Developed
Market or Emerging Market country, including securities issued by
supranational issuers, such as The World Bank, and derivative debt
securities that replicate, or substitute for, the currency of a Developed
Market or Emerging Market country. The maximum exposure to any one Developed
Market country or currency is limited to 25% of the Fund's total assets. The
maximum exposure to any Emerging Market country or currency is limited to
15% of the Fund's total assets."
"Developed Markets" are those countries contained in the Salomon Smith
Barney World Government Bond Index, excluding Australia, Canada, New Zealand and
the United Kingdom (the "Commonwealth Countries"). "Emerging Markets" are those
countries which are not Developed Markets or Commonwealth Countries.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE AMENDMENTS
TO THE FUND'S INVESTMENT POLICIES TO ALLOW THE FUND TO INVEST UP TO 35% OF ITS
TOTAL ASSETS IN GLOBAL DEBT SECURITIES.
PROPOSAL 4(B): AMENDMENTS TO THE FUND'S PRINCIPAL INVESTMENT OBJECTIVE AND
INVESTMENT POLICIES REGARDING INVESTMENTS IN HIGH GRADE FIXED-INCOME SECURITIES.
The Board of Directors has approved, subject to the approval by the
shareholders, a change in the principal investment objective of the Fund and a
related change to the investment policies of the Fund. The Fund's principal
investment objective is high current income by investing in high grade
fixed-income securities denominated in the Commonwealth Currencies. Currently,
the Fund pursues this objective by investing at least 75% of its assets in
so-called high quality investments. To be considered high quality, an investment
(or issuer of an investment) must be rated, at the time of investment, not less
than Aa or Prime 2 by Moody's or AA or A-2 by S&P, or comparably rated by
another appropriate nationally or internationally recognized rating agency, or,
if unrated, judged by the Investment Manager to be of equivalent quality.
Primarily in order to be able to take advantage of higher interest rates
prevailing in those global debt markets where securities are not rated high
quality, the Board of Directors has approved, subject to the approval by the
shareholders, the following pair of changes:
It is proposed that the portion of the Fund's investment objectives which
now reads:
"The Fund's principal investment objective is to provide high current income
by investing in high grade fixed-income securities denominated in the
Commonwealth Currencies."
be amended to read as set forth below:
"The Fund's principal investment objective is to provide high current income
by investing primarily in fixed-income securities denominated in the
Commonwealth Currencies."
It is also proposed that the investment policy of the Fund which now reads:
"At least 75% of the Fund's investments (or the issuers of those
investments) will be rated, at the time of investment, high quality; that
is, rated not less than Aa or Prime 2 by Moody's, or AA or A-2 by S&P, or
comparably rated by another appropriate nationally or internationally
recognized rating agency, or, if unrated, judged by the Investment Manager
to be of equivalent quality."
18
be amended to read as set forth below:
"The market value weighted average of the Fund's investments (or the issuers
of those investments) will be rated not less than A2 by Moody's, or A by
S&P, or comparably rated by another appropriate nationally or
internationally recognized rating agency, or, if unrated, judged by the
Investment Manager to be of equivalent quality."
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE AMENDMENTS
TO THE FUND'S PRINCIPAL INVESTMENT OBJECTIVE AND INVESTMENT POLICIES REGARDING
INVESTMENTS IN HIGH GRADE FIXED-INCOME SECURITIES DENOMINATED IN THE
COMMONWEALTH CURRENCIES.
PROPOSAL 4(C): AMENDMENT TO THE FUND'S INVESTMENT POLICIES TO ALLOW THE
FUND TO INVEST UP TO 15% OF ITS TOTAL ASSETS IN DEBT SECURITIES RATED, OR
JUDGED BY THE INVESTMENT MANAGER TO BE, BELOW INVESTMENT GRADE
AT THE TIME OF INVESTMENT.
The Board of Directors has approved, subject to approval by the
shareholders, additional changes in certain of the Fund's investment policies
regarding the quality of the Fund's investments. In Proposal 4(B) above, the
shareholders have been asked to approve a change to the Fund's investment
policies which would allow the Fund to maintain a market value weighted average
rating on its portfolio securities of not less than A2 by Moody's or A by S&P.
It is proposed that, in addition to changes proposed above, the portion of
the Fund's investment policies which now reads:
"The remainder of the Fund's investments (or issuers of those investments)
will be rated no less than A2 or A (or comparably rated) by those rating
agencies or, if unrated, judged by the Investment Manager to be equivalent
quality."
be amended to read as set forth below:
"Up to 15% of the Fund's investments (or the issuers of those investments)
may be rated below investment grade at the time of investment; that is rated
below Baa3 by Moody's or BBB- by S&P, or comparably rated by another
appropriate nationally or internationally recognized rating agency, or if
unrated, judged by the Investment Manager to be of equivalent quality. All
of the Fund's investments (or the issuers of those investments) must be
rated, at the time of investment, B3 or better by Moody's, or B- or better
by S&P, or comparably rated by another appropriate nationally or
internationally recognized rating agency, or if unrated, judged by the
Investment Manager to be of equivalent quality."
For information regarding the potential risks of investing in below
investment grade securities, see "Risks Involved in Higher Yielding Investments"
and "Management of Credit Risk" in Appendix A.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE AMENDMENT
TO THE FUND'S INVESTMENT POLICIES TO ALLOW THE FUND TO INVEST UP TO 15% OF ITS
TOTAL ASSETS IN DEBT SECURITIES RATED, OR JUDGED BY THE INVESTMENT MANAGER TO
BE, BELOW INVESTMENT GRADE AT THE TIME OF INVESTMENT.
19
PROPOSAL 4(D): AMENDMENT TO THE FUND'S INVESTMENT POLICIES TO ALLOW THE
FUND TO INVEST IN EQUITY SECURITIES ISSUED BY CERTAIN
U.S. REGISTERED INVESTMENT COMPANIES.
The Board has also approved, subject to the approval of the shareholders, an
amendment to the Fund's investment policies to allow the Fund to invest up to
10% of its assets in the equity securities of other investment companies that
are registered under the 1940 Act and that are themselves invested primarily in
fixed-income securities. This investment policy would permit the Fund to take
advantage of the particular expertise of other funds that concentrate in a
global debt sector.
It is proposed that the investment policies of the Fund be amended by adding
the following paragraph:
"Subject to the limitations set forth in Section 12(d) of the Investment
Company Act of 1940, the Fund may invest up to 10% of its total assets in
equity securities issued by other investment companies whose securities are
registered under the 1940 Act and whose investment objective is to invest
primarily in fixed-income securities."
As noted above, as a shareholder of another investment company, the Fund
would bear its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory and
other expenses that the Fund bears in connection with its own operations.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE AMENDMENT
TO THE FUND'S INVESTMENT POLICIES TO ALLOW THE FUND TO INVEST IN THE EQUITY
SECURITIES ISSUED BY CERTAIN U.S. REGISTERED INVESTMENT COMPANIES.
PROPOSAL 4(E): AMENDMENTS TO THE FUND'S INVESTMENT POLICIES AND INVESTMENT
RESTRICTIONS TO ALLOW THE FUND TO USE DERIVATIVES.
The Board has also approved a set of amendments to the Fund's investment
policies and investment restrictions which are necessary to permit the Fund to
use derivatives. This set of amendments also requires shareholder approval.
If these amendments are approved, with respect to the portion of the
portfolio not denominated in a Commonwealth Currency, the Fund will be permitted
to use derivatives to manage both currency and interest rate risk and to
replicate, or substitute for, physical securities in order to achieve
transactional efficiencies. The types of derivatives which may be used with
respect to this portion of the Fund's portfolio include, but are not limited to,
futures, options, forwards, forwards that can only be settled in U.S. Dollars,
swaps, and securities with structured cash flows, whether traded on an exchange
or over-the-counter, that have as their underlying security reference to a fixed
income security or currency.
With respect to investments denominated in Commonwealth Currencies,
derivatives could only be used to manage interest rate risk. The types of
derivatives which may be used with respect to this portion of the Fund's
portfolio include, without limitation, exchange-traded fixed income futures and
options.
It is proposed that the investment policies of the Fund be amended by adding
the following paragraph:
"The Fund may, with respect to the Global Debt Securities portion of its
portfolio, use derivatives to manage currency and interest rate risk and as
a substitute for, or to replicate, physical securities. The Fund may also
use derivatives with respect to its investments denominated in Commonwealth
Currencies to manage interest rate risk through investing in exchange traded
interest rate derivatives."
20
It is also proposed that the investment restriction which now states that
the Fund may not:
"Make short sales of securities or maintain a short position."
be amended to provide that the Fund may not:
"Make short sales of securities or maintain a short position (OTHER THAN
WITH RESPECT TO THE USE OF DERIVATIVES)."
It is further proposed that the investment restriction which now states that the
Fund may not:
"(i) Purchase or sell real estate, except that it may purchase and sell
mortgage-backed securities, debt securities issued by real estate investment
trusts, and debt securities of companies which deal in real estate or
interest therein, (ii) purchase or sell commodities (other than transactions
in foreign currencies and forward currency contracts) or (iii) invest in
interests in oil, gas, or other mineral exploration or development programs,
except that it may purchase and sell debt securities of companies that deal
in oil, gas or other mineral exploration or development programs."
be amended to provide that the Fund may not:
"(i) Purchase or sell real estate, except that it may purchase and sell
mortgage-backed securities, debt securities issued by real estate investment
trusts, and debt securities of companies which deal in real estate or
interest therein, (ii) purchase or sell commodities (other than transactions
in foreign currencies and forward currency contracts OR DERIVATIVES IN
ACCORDANCE WITH THE FUND'S INVESTMENT OBJECTIVES AND POLICIES) or (iii)
invest in interests in oil, gas, or other mineral exploration or development
programs, except that it may purchase and sell debt securities of companies
that deal in oil, gas or other mineral exploration or development programs."
The added language is shown in italics for easy reference.
If these amendments are approved, the Fund would be permitted to invest up
to 80% of its total assets in derivatives positions. For information regarding
the potential risks of investing in derivatives, see "Risks Associated with the
Use of Derivatives" and "Management of Risk from Derivatives" in Appendix A.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE AMENDMENTS
TO THE FUND'S INVESTMENT POLICIES AND INVESTMENT RESTRICTIONS TO ALLOW THE FUND
TO USE DERIVATIVES.
In addition to the proposed amendments to the Fund's investment policies
which require the approval of shareholders, the Fund's Board of Directors has
approved certain changes in its investment policies which do not require the
approval of shareholders. In order to give a complete statement of the Fund's
investment objectives, investment policies and investment restrictions, Appendix
C sets forth the entire text of the Fund's investment objectives, investment
policies and investment restrictions as they will read upon amendment.
OTHER MATTERS
The Board of Directors knows of no business to be brought before the Meeting
other than as set forth above. If, however, any other matters properly come
before the Meeting, it is the intention of the persons named in the enclosed
proxy form to vote such proxies on such matters in accordance with their best
judgment.
21
FURTHER INFORMATION REGARDING DIRECTORS AND OFFICERS
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of
the Securities Exchange Act of 1934 (the "Exchange Act") and Section 30(h) of
the 1940 Act, as applied to the Fund, require the Fund's officers, Directors,
investment manager or adviser, affiliates of the investment manager or adviser,
and persons who beneficially own more than 10% of a registered class of the
Fund's outstanding securities ("Reporting Persons"), to file reports of
ownership of the Fund's securities and changes in such ownership with the
Securities and Exchange Commission and the New York Stock Exchange. Such persons
are required by Securities and Exchange Commission regulations to furnish the
Fund with copies of all such filings.
Based solely on its review of the copies of such forms received by it and
written representations from certain Reporting Persons that no year-end reports
were required for those persons, the Fund believes that during the fiscal year
ended October 31, 1998, its Reporting Persons complied with all applicable
filing requirements.
COMMITTEES AND BOARD OF DIRECTORS MEETINGS. The Board of Directors has a
standing Audit Committee, which consists of certain Directors who are not
interested persons of the Fund as defined in the 1940 Act. The principal purpose
of the Audit Committee is to review the scope and results of the annual audit
conducted by the Fund's independent public accountants and the evaluation by
such accountants of the accounting procedures followed by the Fund. The Board of
Directors also has a standing Contract Review Committee that reviews and makes
recommendations to the Board with respect to entering into, renewal or amendment
of the Management Agreement, the Advisory Agreement and the Administration
Agreement. The Board of Directors does not have a standing nominating or
compensation committee.
During the Fund's fiscal year ended October 31, 1998, the Board of Directors
held four regularly scheduled meetings and four special meetings, the Audit
Committee held two meetings and the Contract Review Committee held one meeting.
Each of the Directors then in office attended at least 75% of the aggregate
number of regularly scheduled meetings of the Board of Directors and all of the
Committees of the Board on which he served. However, Dr. Schrafl missed two
special meetings and Mr. Horsburgh missed four special meetings bringing their
aggregate attendance at all board meetings below 75%.
OFFICERS OF THE FUND. The officers of the Fund, all of whom serve at the
pleasure of the Board of Directors and, with the exceptions of Mr. Sechos and
Ms. Sananikone-Fletcher, all of whom have served the Fund since its inception,
are as follows: Laurence S. Freedman (age 55), President; Brian M. Sherman (age
55), Sole Vice President; David Manor (age 58), Treasurer; Ouma
Sananikone-Fletcher (age 40), Assistant Vice President-Chief Investment Officer;
Barry G. Sechos (age 37), Assistant Treasurer; Roy M. Randall (age 62),
Secretary; Allan S. Mostoff (age 66), Assistant Secretary; and Margaret A.
Bancroft (age 60), Assistant Secretary.
The respective principal occupations during the past five years of the
Fund's officers are as follows: Messrs. Freedman, Sherman and Manor shown above
in the table of nominees and Directors under "Proposal 1: Election of Class I
Directors"; Ouma Sananikone-Fletcher, Investment Director, EquitiLink Australia
Limited (since 1994), Chief Executive Officer, EquitiLink Australia Limited
(since 1997), Director, EquitiLink Holdings Limited (since 1998) and Executive
Director, Banque Nationale de Paris (1986-1994); Barry G. Sechos, General
Counsel to EquitiLink Australia Limited (since 1993), Director, EquitiLink
Australia Limited (since 1994) and Director, EquitiLink Holdings Limited (since
1998); Roy M. Randall, Partner of Stikeman, Elliott (Australian office of
Canadian law firm) (since 1997) and Partner,
22
Freehill Hollingdale & Page (1981-1996); Allan S. Mostoff and Margaret A.
Bancroft, Partners of Dechert Price & Rhoads (U.S. law firm).
RELATIONSHIP OF DIRECTORS OR NOMINEES WITH THE INVESTMENT ADVISER AND THE
INVESTMENT MANAGER. EquitiLink International Management Limited (the "Investment
Manager") serves as investment manager to the Fund and EquitiLink Australia
Limited (the "Investment Adviser") serves as investment adviser to the Fund
pursuant to a management agreement dated February 20, 1992 and an advisory
agreement dated February 20, 1992.
The Investment Manager is a Jersey, Channel Islands corporation organized in
October 1985 with its registered office located at Level 2, 17 Bond Street, St.
Helier, Jersey, Channel Islands. The Investment Adviser is an indirect wholly
owned subsidiary of EquitiLink Holdings Limited, an Australian corporation. The
registered offices of the Investment Adviser and EquitiLink Holdings Limited are
located at Level 3, 190 George Street, Sydney, N.S.W., Australia.
Messrs. Freedman and Sherman, each a Director of the Fund, serve as
directors of the Investment Manager. Mr. Manor, a Director of the Fund, serves
as the Managing Director of the Investment Manager. In addition, Messrs.
Freedman and Sherman are the principal shareholders of the Investment Manager,
of which Mr. Manor is also a shareholder. Messrs. Freedman and Sherman also
serve as, respectively, Joint Managing Director, and Joint Managing Director and
Chairman of the Investment Adviser. Messrs. Freedman and Sherman are the
principal shareholders of EquitiLink Holdings Limited, of which Mr. Manor is
also a shareholder.
On March 15, 1998, Mr. Gleeson-White sold 169,278 shares of EquitiLink
Limited, the direct parent of the Investment Adviser, for 70 cents per share. On
August 12, 1998, Mr. Gleeson-White sold his remaining 330,722 shares of
EquitiLink Limited to the major shareholders of the corporation for 65 cents per
share as part of the privatization of EquitiLink Limited. Until August 1997, Mr.
Gleeson-White was also a shareholder of the Investment Manager.
COMPENSATION OF DIRECTORS AND CERTAIN OFFICERS. The following table sets
forth information regarding compensation of Directors by the Fund and by the
fund complex of which the Fund is a part for the fiscal year ended October 31,
1998. Officers of the Fund and Directors who are interested persons of the Fund
do not receive any compensation from the Fund or any other fund in the fund
complex. In the column headed "Total Compensation From Registrant and Fund
Complex Paid to Directors," the number in parentheses indicates the total number
of boards in the fund complex on which the Director serves.
23
COMPENSATION TABLE
FISCAL YEAR ENDED 10/31/98
TOTAL
PENSION OR COMPENSATION
AGGREGATE RETIREMENT ESTIMATED FROM REGISTRANT
COMPENSATION BENEFITS ACCRUED ANNUAL AND FUND
FROM AS PART OF BENEFITS UPON COMPLEX PAID
NAME OF PERSON, POSITION REGISTRANT FUND EXPENSES RETIREMENT TO DIRECTORS
- ------------------------------------------------ ------------- ------------------- --------------- ---------------
Sir Roden Cutler................................ $ 15,500 Nil Nil $ 47,750(3)
David Lindsay Elsum............................. 16,000 Nil Nil 48,250(3)
Laurence S. Freedman............................ 0 Nil Nil 0(3)
Rt. Hon. Malcolm Fraser......................... 17,500 Nil Nil 60,250(3)
Michael Gleeson-White+.......................... 2,758 Nil Nil 2,758(1)
Michael R. Horsburgh............................ 11,500 Nil Nil 42,750(3)
David Manor..................................... 0 Nil Nil 0(2)
William J. Potter............................... 17,000 Nil Nil 60,250(3)
Peter D. Sacks.................................. 15,000 Nil Nil 37,750(2)
E. Duff Scott................................... 16,000 Nil Nil 16,000(1)
John T. Sheehy.................................. 15,500 Nil Nil 58,750(3)
Brian M. Sherman................................ 0 Nil Nil 0(3)
Warren C. Smith................................. 15,500 Nil Nil 15,500(1)
PREFERRED DIRECTORS:
Roger C. Maddock*............................... 0 Nil Nil 0(3)
Dr. Anton E. Schrafl............................ 12,500 Nil Nil 12,500(1)
- ------------------------
+ Mr. Gleeson-White was considered an interested director because of his
affiliation with the Fund's investment adviser until August 12, 1998 when he
sold his remaining interest in the direct parent of the investment adviser.
As a result, the amount shown is for the period August 13, 1998 through
October 31, 1998 only.
* Mr. Maddock resigned from the Board of Directors effective December, 1998.
ADDITIONAL INFORMATION
EXPENSES. The expense of preparation, printing and mailing of the enclosed
form of proxy and accompanying Notice and Proxy Statement will be borne by the
Fund. The Fund will reimburse banks, brokers and others for their reasonable
expenses in forwarding proxy solicitation material to the beneficial owners of
the shares of the Fund. In order to obtain the necessary quorum at the Meeting,
supplementary solicitation may be made by mail, telephone, telegraph or personal
interview. Such solicitation may be conducted by, among others, officers,
Directors and employees of the Fund, the Investment Manager, the Investment
Adviser or State Street Bank and Trust Company, the Transfer Agent of the Fund.
Shareholder Communications Corporation ("SCC") may be retained to assist in the
solicitation of proxies. If retained, SCC will be paid approximately $20,000 by
the Fund and the Fund will reimburse SCC for its related expenses.
SOLICITATION AND VOTING OF PROXIES. Solicitation of proxies is being made
primarily by the mailing of this Proxy Statement with its enclosures on or about
February 12, 1999. As mentioned above, SCC may be
24
engaged to assist in the solicitation of proxies. As the meeting date
approaches, certain shareholders of the Fund may receive a call from a
representative of SCC if the Fund has not yet received their vote. Authorization
to permit SCC to execute proxies may be obtained by telephonic or electronically
transmitted instructions from shareholders of the Fund. Proxies that are
obtained telephonically will be recorded in accordance with the procedures set
forth below. Management of the Fund believes that these procedures are
reasonably designed to ensure that the identity of the shareholder casting the
vote is accurately determined and that the voting instructions of the
shareholder are accurately determined.
In all cases where a telephonic proxy is solicited, the SCC representative
is required to ask the shareholder for such shareholder's full name, address,
social security or employer identification number, title (if the person giving
the proxy is authorized to act on behalf of an entity, such as a corporation),
the number of shares owned and to confirm that the shareholder has received the
Proxy Statement in the mail. If the information solicited agrees with the
information provided to SCC by the Fund, then the SCC representative has the
responsibility to explain the process, read the proposals listed on the proxy
card, and ask for the shareholder's instructions on each proposal. The SCC
representative, although he or she is permitted to answer questions about the
process, is not permitted to recommend to the shareholder how to vote, other
than to read any recommendation set forth in the proxy statement. SCC will
record the shareholder's instructions on the card. Within 72 hours, SCC will
send the shareholder a letter or mailgram to confirm the shareholder's vote and
asking the shareholder to call SCC immediately if the shareholder's instructions
are not correctly reflected in the confirmation.
If a shareholder wishes to participate in the Meeting of shareholders, but
does not wish to give a proxy by telephone, such shareholder may still submit
the proxy card originally sent with the Proxy Statement or attend in person. Any
proxy given by a shareholder, whether in writing or by telephone, is revocable.
A shareholder may revoke the accompanying proxy or a proxy given telephonically
at any time prior to its use by filing with the Fund a written revocation or
duly executed proxy bearing a later date. In addition, any shareholder who
attends the Meeting in person may vote by ballot at the Meeting, thereby
canceling any proxy previously given.
VOTE REQUIRED. The presence at any shareholders' meeting, in person or by
proxy, of shareholders entitled to cast a majority of the votes entitled to be
cast shall be necessary and sufficient to constitute a quorum for the
transaction of business. In the event that the necessary quorum to transact
business or the vote required to approve or reject any proposal is not obtained
at the Meeting, the persons named as proxies may propose one or more
adjournments of the Meeting in accordance with applicable law, to permit further
solicitation of proxies with respect to any proposal which did not receive the
vote necessary for its passage or to obtain a quorum. With respect to those
proposals for which there is represented a sufficient number of votes in favor,
actions taken at the Meeting will be effective irrespective of any adjournments
with respect to any other proposals. Any such adjournment will require the
affirmative vote of the holders of a majority of the Fund's shares present in
person or by proxy at the Meeting. The persons named as proxies will vote in
favor of such adjournment those proxies which they are entitled to vote in favor
and will vote against any such adjournment those proxies to be voted against
that proposal. For purposes of determining the presence of a quorum for
transacting business at the Meeting, abstentions and broker "non-votes" will be
treated as shares that are present but which have not been voted. Broker
non-votes are proxies received by the Fund from brokers or nominees when the
broker or nominee has neither received instructions from the beneficial owner or
other persons entitled to vote nor has discretionary power to vote on a
particular matter. Accordingly, shareholders are urged to forward their voting
instructions promptly.
25
Approval of the election of Class I Directors of the Board of Directors
(Proposal 1) will require the affirmative vote of a majority of the shares of
common stock present in person or by proxy at the Meeting. Approval of the
election of Preferred Directors of the Board of Directors (Proposal 2) will
require the affirmative vote of a majority of the shares of preferred stock
present in person or by proxy at the Meeting. Approval of the proposed
amendments to the Fund's principal investment objective, investment policies and
investment restrictions to allow the Fund to invest up to 35% of its total
assets in Global Debt Securities (Proposals 4(A), 4(B) 4(C), 4(D) and 4(E)) will
each require the affirmative vote of a "majority of the outstanding voting
securities" of the Fund. The term "majority of the outstanding voting
securities" as defined in the Investment Company Act of 1940, as amended, and as
used in this Proxy Statement means: the affirmative vote of the lesser of (1)
67% of the voting securities of the Fund present at the meeting if more than 50%
of the outstanding shares of the Fund are present in person or by proxy or (2)
more than 50% of the outstanding shares of the Fund. The outstanding voting
securities of the Fund include both the common and preferred shares voting
together as a single class. Abstentions and broker "non-votes" will have the
effect of a "no" vote for these proposals.
Ratification of the selection of the independent public accountants
(Proposal 3) will require the affirmative vote of a majority of the votes of the
common and preferred stock, voting together as a single class, validly cast at a
meeting at which a quorum is present. Abstentions and broker "non-votes" will
have no effect on the vote on this proposal since they are not considered votes
cast.
SHAREHOLDER PROPOSALS. If a shareholder intends to present a proposal at
the Annual Meeting of Shareholders of the Fund to be held in 2000 and desires to
have the proposal included in the Fund's proxy statement and form of proxy for
that meeting, the shareholder must deliver the proposal to the offices of the
Fund by October 15, 1999.
Shareholders wishing to present proposals at the Annual Meeting of
Shareholders of the Fund to be held in 2000 which they do not wish to be
included in the Fund's proxy materials should sent written notice to the
Secretary of the Fund of such proposals by December 29, 1999 in the form
prescribed in the Fund's By-Laws.
By Order of the Board of Directors,
Roy M. Randall, SECRETARY
800 Scudders Mill Road
Plainsboro, New Jersey 08536
February 8, 1999
26
APPENDIX A
This Appendix A discusses risks involved in investing in below investment
grade and high yield securities, risks involved in investing in Global Debt
Securities and risks associated with the use of derivatives. It also contains
EquitiLink's current views on managing credit risk and the risks associated with
the use of derivatives and EquitiLink's review of structural changes in the
Commonwealth bond markets. The derivatives exposure and counterparty limits
described in the section concerning management of risk from derivatives
represent EquitiLink's current policies, which may be amended in consultation
with the Board of Directors.
RISKS INVOLVED IN HIGHER YIELDING INVESTMENTS
Investments in below investment grade and high yield securities requires
certain considerations not typically associated with investing in prime quality
securities issued by Australian, Canadian, New Zealand and United Kingdom
issuers. The following summarizes the main risks involved in investing in below
investment grade and high yield securities relative to similar types of
securities in Australia, Canada, New Zealand and the United Kingdom. In managing
the Fund, EquitiLink will manage all risks in accordance with the stated
investment guidelines.
CREDIT RISK. Under the proposal, the Fund will be permitted to invest up to
15% of its total assets in securities rated below investment grade, i.e.
securities that have been rated below BBB- by S&P or Baa3 by Moody's.
Investments in these securities are subject to greater market fluctuations and
risk of loss of income and principal than investments in securities with
investment grade credit ratings. The former will generally provide higher yields
due to the higher premia required by investors for taking the associated higher
credit risk.
Investment in debt securities exposes the Fund to credit risk (being the
risk of default on interest and principal payments). Credit risk is influenced
by changes in general economic and political conditions and changes in the
financial condition of the issuers. During periods of economic downturn or
rising interest rates, issuers of securities with a low credit rating may
experience financial weakness that could affect their ability to make payments
of interest and principal.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the value and liquidity of securities
with low credit ratings, especially in markets characterized by a low volume of
trading.
UNRATED SECURITIES. Under the proposal, the Fund will be permitted to
invest in unrated debt securities. Unrated securities, while not necessarily of
lower quality than rated securities, generally do not have a broad market.
Before purchasing an unrated security, the Investment Manager intends to analyze
the creditworthiness of the issuer of the security and of any financial
institution or other party responsible for payments on the security in order to
assign a rating to the security.
BELOW INVESTMENT GRADE SECURITIES. Ratings of debt securities represent the
rating agency's opinion regarding their quality and are not a guarantee of
quality. Rating agencies attempt to evaluate the safety of principal and
interest payments and do not evaluate the risks of fluctuations in market value.
Since rating agencies may fail to make timely changes in credit ratings in
response to subsequent events, the Investment Manager will continuously monitor
the issuers of securities held to determine whether the issuers have sufficient
cash flows and profits to meet principal and interest payments.
A-1
The achievement of the Fund's investment objective will be more dependent on
EquitiLink's own credit analysis than might be the case for a fund which invests
in higher quality bonds. The Fund may retain a security the rating of which has
been changed. The market values of lower quality debt securities tend to reflect
individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates.
Lower quality debt securities tend to be highly leveraged. Their issuers may
also not have available to them traditional methods of financing. For example,
during an economic downturn or a sustained period of rising interest rates,
highly leveraged issuers of lower quality securities may experience financial
stress. During such periods, issuers may not have sufficient revenue to meet
their interest payment obligations. The issuer's ability to service debt
obligations may also be adversely affected by specific developments affecting
the issuer, such as the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. The risk of loss due to
default by the issuer is significantly greater for the holders of lower quality
securities because such securities are generally unsecured and are often
subordinated to higher ranking creditors of the issuer.
Lower quality debt securities occasionally have call or buy-back features
that would permit an issuer to call or repurchase the security from the holder.
The Investment Manager anticipates that such securities could be sold only to a
limited number of dealers or institutional investors as there may not be an
established retail secondary market for many of these securities, or where there
is a market, the securities may not be easily tradable.
The Fund may also incur additional expense to the extent that it is required
to seek recovery on a default in the payment of principal or interest on its
portfolio holdings, and the Fund may have limited legal recourse in the event of
a default.
The Investment Manager will attempt to minimize the speculative risks
associated with investments in lower quality securities through credit analysis
and by carefully monitoring such current trends as interest rates and economic
developments.
COUNTERPARTY RISK. The derivatives used for adjusting currency exposures or
replicating underlying securities are usually over-the-counter ("OTC")
securities. OTC securities carry credit risk associated with the counterparty
institution. To manage this risk, the Investment Manager will only use
counterparty institutions rated A- or better by recognized international ratings
agencies.
The counterparties for derivatives as proposed in the investment guidelines
are as follows:
- exchange traded derivatives--recognized derivatives exchanges such as the
Sydney Futures Exchange; and
- over-the-counter derivatives--financial institutions rated A- or better by
a recognized international rating agency.
LIQUIDITY RISK. The markets for below investment grade securities may be
substantially smaller, less developed, less liquid and more volatile than the
markets for prime rated securities.
Reduced liquidity often creates higher volatility, as well as difficulties
in obtaining accurate market quotations for financial reporting purposes and for
calculating net asset values. Market quotations on many securities may only by
available from a limited number of dealers and may not necessarily represent
firm bids from those dealers or prices for actual sales.
A-2
LEVERAGE RISK. The Fund has issued US$30 million of Auction Market
Preferred Stock (the "AMPS") which is tantamount to borrowing this sum of money.
The AMPS create an opportunity for the Fund's holders of common stock to
experience greater capital appreciation and higher yields, while at the same
time increasing exposure to capital risk.
MANAGEMENT OF CREDIT RISK
At the upper end of the credit rating spectrum, recognized international
ratings agencies such as S&P and Moody's provide extensive risk credit analysis
for investors. However, in emerging markets, where issues are often unrated or
at the lower end of the credit risk spectrum, EquitiLink believes that
opportunities exist for skilled analysts to add value through extensive company
research and detailed credit assessment. The process of credit assessment is
similar to that undertaken when considering an equity investment, rather than a
debt purchase.
CREDIT ANALYSIS IS AKIN TO EQUITY INVESTING
AT THE MACRO AND SECTORAL LEVEL. An equity strategist must determine if the
stock market as a whole is cheap or expensive. An assessment of each individual
sector must also be carried out. Similarly, a credit strategist must determine
if the credit market as a whole is cheap or expensive. As with stocks, an
assessment of each individual sector must also be carried out.
AT THE SECURITY LEVEL. In stock investing, the analyst determines "fair
value" for a stock price (discounting cash flows, price earnings ratios), then
compares that to the market price of the stock. The analyst also assesses
qualitative factors, such as management capability. The goal is for the stock to
rise in price.
In debt investing, the analyst determines the likelihood of default (by
assessing debt to equity levels, interest coverage, profitability, etc.), then
compares that to the market price offered for that issuer. As with stock
investing, the analyst must also assess qualitative factors, such as management
capability. The goal is to ensure that the issuer will remain in business for
the life of the security (i.e., to make interest payments plus return of
principal).
ANALYTICAL PROCESS
As a starting point, a view on the economic and individual sector outlooks
for each country is developed. This permits EquitiLink to take a view on the
weighting it should give to investment in a particular country based on an
analysis covering economic, political, foreign exchange and interest risk
factors identified with a country and a region. Factors such as the likelihood
of inflation, fiscal policies, the stability of a government and its willingness
to repay its obligations or the likelihood of instituting exchange controls are
taken into account as well as an assessment of the strength of a local currency.
While this level of analysis allows EquitiLink to determine exposure to local
currency and to sovereign debt, in the case of investing in debt instruments
issued by a corporations in a country, a detailed assessment of the individual
issuers in each market is undertaken. A summary of this process is set out
below.
SECTOR ALLOCATION. Consideration is given to the relevant sector and the
current exposure to this sector. Fund managers develop views on sectors from the
macro-economic research undertaken, and from periodic broker reports. They look
at a range of factors including an industry's life cycle, shorter-term cyclical
developments and expected changes in government policy that could affect the
profitability.
A-3
COMPANY ANALYSIS
QUANTITATIVE. Financial ratios and other data-related analysis provide a
broad indication of the capacity of a company to remain in business. Areas
researched include:
- liquidity--to determine near-term solvency. While financial ratios vary
across industries, two useful ratios in this category are the current
ratio (current assets/current liabilities) and the quick ratio;
- cashflow--to determine whether a company's operating cash flows are able
to meet its investment and financing requirements;
- leverage--to determine the amount of leverage and the capacity to finance
the borrowings, two ratios are used: the debt-to-equity ratio and the
interest coverage ratio;
- credit structure--analysis of when a company's debt is maturing (and/or is
redeemable by the holders), this amount, whether this is floating or fixed
and the currency denomination, assists in determining the extent to which
a company is exposed to a potential liquidity squeeze, as well as interest
rate and foreign exchange fluctuations; and
- profitability--ratios such as return-on-assets and return-on-equity
provide a means of assessing management's operational ability to generate
future earnings and the company's ability to earn an adequate return on
shareholder equity. This provides an indication of whether the company
will be able to raise capital in the future.
QUALITATIVE. Fund managers perform qualitative research to gain a thorough
understanding of a company's growth and profit potential, financial position,
capital requirements, competitive position, management quality, ownership
structure and critical success factors. Issues considered include the company's
long-term strategy, the skills and experience of management, whether there have
been any recent changes, as well as details of related parties or substantial
shareholders.
Other forms of qualitative research include:
- a review of the company's share price over time;
- consideration of the terms of the debt, including right to recourse and
whether the debt is secured with assets; and
- comparison of the price of the security with similar issues, taking into
account credit ratings, maturity, country, industry and business and
financial risks.
EXTERNAL CREDIT ASSESSMENT. External credit assessment involves a review of
rating agency (S&P and Moody's) reports and recent broker reports on the
company. Fund managers will often contact the analysts who performed the
research for these reports to probe further into certain issues.
Once a company has been fully assessed, Fund managers determine whether the
return on a security is adequate to compensate for the risks of investment.
RISKS INVOLVED IN GLOBAL INVESTMENT
Investments in Global Debt Securities require consideration of some of the
same risks that are inherent in investments in securities denominated in the
Commonwealth Currencies. However, when the investments are in Emerging Market
debt securities, these risks are heightened. The following summarizes
A-4
the main risks of investing in Global Debt Securities. As is the case for
investments in higher yielding securities, in managing the Fund, EquitiLink will
manage all risks in accordance with the stated investment guidelines.
INTEREST RATE RISK. Changes in the level of interest rates, in the relevant
markets in which the Fund invests will affect the market price of its portfolio
securities and the net asset value of the Fund at any given time. These changes
are usually more substantial in Emerging Market countries where large interest
rate changes are not uncommon. The level of interest rate risk will vary from
country to country depending on political and economic factors and monetary
policy.
FOREIGN EXCHANGE RISK. Securities denominated in the currencies of a
Developed or Emerging Market country are subject to fluctuation in value due to
changes in the value of the currency against the U.S. dollar. Fluctuations in
the value of a Developed or Emerging Market currency compared to the U.S. dollar
will give rise to a gain or loss to the Fund. Income received from securities
denominated in Developed or Emerging Market currencies is also translated into
and distributed in U.S. dollars, so that a decline in the value of a Developed
or Emerging Market currency will result in a decline in income to the Fund.
Investments made in the local currencies of an Emerging Market country may
not be freely convertible into other currencies. Exchange rate fluctuations and
local currency devaluation could have a material effect on the value of these
securities.
Currency exchange rates can fluctuate significantly over short periods and
can be subject to unpredictable change based on such factors as political
developments and currency controls by foreign governments. EquitiLink expects to
hedge foreign currency risks in accordance with its views by engaging in foreign
currency exchange transactions. These may include buying and selling foreign
currency options, foreign currency futures, options on foreign currency futures
and swap arrangements. Many of these activities constitute "derivatives"
transactions. See "Management of Derivatives" below.
POLITICAL AND ECONOMIC RISK. Securities of Emerging Market issuers involve
different, and sometimes greater, risks than securities of issuers in Developed
Markets and the Commonwealth Countries. Emerging Market economies are considered
to be more politically volatile than the traditional Western style democracies.
Investments in securities of issuers in Emerging Market countries involve
political risk, including in some countries, the possibility of expropriation,
confiscatory taxation or nationalization of assets, and the establishment of
foreign exchange controls. Central authorities also tend to exercise a high
degree of control over the economies and in many cases have ownership over core
productive assets.
With their strong reliance on international trade, the Emerging Market
economies tend to be sensitive both to economic changes in their own region and
to changes affecting their major trading partners. These include changes in
growth, inflation, foreign exchange rates, current account positions, government
policies, taxation and tariffs.
TAX RISK. Income earned on investments in foreign countries may be subject
to applicable withholding taxes and other taxes imposed by the governments of
such countries. There can be no assurance that foreign tax laws will not be
changed in a manner which adversely affects foreign investors.
LEGAL AND ACCOUNTING RISK. The legal systems in many Emerging Market
countries are less developed than those in more developed countries, with the
administration of laws and regulations often subject to
A-5
considerable discretion. While the development of the legal systems is a
positive step, there is a risk that foreign investors will be adversely affected
by new laws or changes to existing laws.
Debt securities issued by governments in Emerging Markets can differ from
debt obligations issued by private entities in that remedies for defaults
generally must be pursued in the courts of the defaulting government, and legal
recourse may be diminished. Political conditions, in terms of a government's
willingness to meet the terms of its debt obligations, are also of considerable
significance. There can be no assurance that the holders of commercial bank debt
may not contest payments to the holders of debt securities issued by governments
in the event of default by the governments under commercial bank loan
agreements.
Accounting and auditing standards applied in certain Emerging Market
countries frequently do not conform with the accepted international standards
used in the Commonwealth Countries and the U.S. In some cases accounting
policies, for example the use of the constant purchasing power method, can have
a distortive effect. Also, substantially less financial information is generally
publicly available about issuers in Emerging Market countries and, where
available, may not be independently verifiable.
RISKS ASSOCIATED WITH THE USE OF DERIVATIVES
Gains and losses on "derivatives" transactions depend on EquitiLink's
ability to predict correctly the direction on interest rates, securities prices,
currency exchange rates, or other factors. Risks in the use of these derivatives
include:
- imperfect correlation between the prices of derivatives and the movements
of the securities prices, interest rates or currency exchange rates being
hedged (basis risk);
- the possible absence of a liquid secondary market for any particular
derivative at any time (liquidity risk);
- the potential loss if the counterparty to the transaction does not perform
as promised (counterparty risk); and
- the possible need to defer closing out certain positions to avoid adverse
tax consequences as well as the possibility that derivative transactions
may result in deferral of losses or a change in the character of gain
realized (tax risk).
MANAGEMENT OF RISK FROM DERIVATIVES
In expanding the Fund's investment parameters, it will be necessary for the
Investment Manager to be able to use interest rate and currency derivative
securities.
The types of derivative activity anticipated under the new mandate include:
- The ability to adjust country and currency exposures in line with
EquitiLink's investment strategy. Adjustment would take place when
considered prudent.
- The scope to adjust duration and yield curve positions synthetically.
- Substitution/replication for physical securities to provide flexibility in
managing capital gains or losses on the Fund's underlying securities, and
to minimize transaction costs and achieve transactional efficiency.
A-6
GLOBAL DERIVATIVES. The use of derivative securities is a necessary
prerequisite to the expansion of the Fund's investment parameters into Global
Debt Securities.
There are two broad areas for which derivatives are required for investing
in Global Debt Securities:
1. USE OF DERIVATIVES FOR ADJUSTING EXPOSURES (ADJUSTMENT/OVERLAY)
- Currency adjustment (overlays)--By directly investing into Developed or
Emerging Markets, the Fund will take on exposure to the currencies of the
countries in which it holds securities. If investing globally, the
Investment Manager will need to be able to adequately manage this currency
risk when the perceived outlook for a particular currency is for
depreciation against other currencies. The most effective way of doing
this is through the use of currency forwards (and occasionally options),
which provide an efficient means of implementing currency overlay
strategies.
- Interest rate adjustment--Investment in securities denominated in
Developed Market or Emerging Market currencies necessarily means taking on
interest rate risk. This risk, particularly in respect of the Developed
Markets, can often best be managed through the use of interest rate
derivatives in those respective countries. Investment in "Yankee bonds"
involves exposure to both fluctuations in U.S. interest rates and the
credit standing of a particular issuer. There may be times when EquitiLink
wishes to reduce the U.S. interest rate exposure embedded in Yankee bonds.
This can be done by selling U.S. Treasury Note or Bond futures.
2. DERIVATIVES AS A SUBSTITUTE FOR PHYSICAL SECURITIES
(REPLICATION/SUBSTITUTION). Investment in global fixed-income securities may at
certain times be more efficiently achieved using derivative securities to
replicate physical securities. These types of derivatives carry identical market
price risks to the equivalent physical securities but provide a number of
transactional benefits. For example, by using derivatives, the Investment
Manager may be able to implement decisions at lower costs, increase the
after-tax yield, obtain prices that are not available in the underlying cash
market, or settle in U.S. dollars.
In less developed markets, liquidity and credit quality can be enhanced and
transaction costs reduced by using derivatives rather than the underlying
securities. This is due to the fact that the investor assumes the lower
counterparty risk of the issuer of the derivatives (for example, an
international bank rated A- or better), rather than that of a (local currency)
domestic issuer. In certain circumstances, due to lack of available paper or
government regulations, the only means of gaining exposure to a particular
country or countries is through derivatives.
AUSTRALIAN, CANADIAN AND UNITED KINGDOM DERIVATIVES. When the Fund was
launched in February 1992, Australian, Canadian and United Kingdom derivatives
markets were still in their infancy and the use of derivatives as a management
tool was not widespread. As a result, the Fund's investment parameters did not
permit derivatives to be used in managing the portfolio.
With the emergence of efficient domestic interest rate derivatives markets
in the relevant Commonwealth Countries, it would now be more advantageous for
the Fund to be permitted to hold cash-backed interest rate derivatives. The use
of derivatives for the Fund would allow the Investment Manager to modify
interest rate risk, with the benefit of low transaction costs. Importantly, the
use of derivatives would also enable the Investment Manager to adjust the Fund's
duration or its positioning along the yield curve without the need to sell
physical securities. This would be an advantage at times when the sale of
physical securities may have an adverse impact on distributions, for example,
where it would result in the realization of sizable capital gains or losses, or
the sale of high coupon securities.
A-7
The Investment Manager proposes that only the use of exchange-traded (as
opposed to over-the-counter) interest rate derivatives be allowed in the
Australian, Canadian and United Kingdom component of the Fund. The Investment
Manager will not use derivatives where they would contravene the guidelines set
by the rating agencies for AMPS issues.
The Investment Manager does not propose to use currency derivatives to hedge
Australian dollar, Canadian dollar or Pound Sterling currency risk associated
with investments by the Fund in these markets. The Investment Manager believes
that using currency derivatives for this purpose would alter the fundamental
charter of the Fund, namely that investors assume exposure primarily to the
Commonwealth Currencies as part of their investment in the Fund. However, where
the outlook for a particular Commonwealth Currency is considered by the
Investment Manager to be better than an alternate currency that the Fund can
invest in, the Fund would have the scope to use derivatives to hedge that
currency into a Commonwealth Currency or into the U.S. dollar.
Derivatives will not be used to magnify risk (versus physical investing) or
to expose the Fund to a large contingent liability.
DERIVATIVES EXPOSURES AND COUNTERPARTY LIMITS. In general, derivatives will
not be utilized to leverage the Fund. All futures and forwards are to be
measured on a notional exposure basis and, therefore, they will be deemed to be
cash-backed.
OVER-THE-COUNTER DERIVATIVES. When dealing in over-the-counter derivatives,
all bank counterparties must have a credit rating of at least A-. Only up to 5%
of total assets may be put at risk in derivatives transactions with any single
counterparty (aggregate interest rate and currency derivatives exposure). A
maximum of 10% of total assets may be at risk in currency-linked notes and a
maximum of 2.5% of total assets may be at risk to any single counterparty in
currency forwards which can be settled only in U.S. dollars.
EXCHANGE-TRADED DERIVATIVES. A maximum of 40% of total assets may be at risk
in exchange-traded derivatives. For Australian, Canadian and United Kingdom
derivatives, the maximum gross exposure (long positions + short positions) will
be 25% of total assets and the maximum net exposure (long positions-- short
positions) will be 20% of total assets. A maximum of 35% of total assets may be
at risk in derivatives traded on the Chicago Board of Trade. A maximum of 7% of
total assets may be at risk in derivatives traded on any one other futures
exchange.
STRUCTURAL CHANGES IN THE COMMONWEALTH BOND MARKETS
The Investment Manager believes that Commonwealth bond yields are likely to
remain low by historical standards and that the differential between
Commonwealth and US bond yields will remain narrow for some time. The
implications for this are twofold: first, while the fundamentals remain positive
for Commonwealth bonds, further significant capital gains are unlikely; and
second, there is likely to be less yield enhancement out of the Commonwealth
bond markets than has been seen in the past.
A-8
CONSUMER PRICE INFLATION (YEAR AVERAGE)
YEAR TO 9/98
LATEST
1991 1995 AVAILABLE
AUSTRALIA 3.2% 5.0% 1.3%
CANADA 5.6% 1.8% 0.7%
NEW ZEALAND 2.6% 2.9% 1.7%
UNITED KINGDOM 5.9% 3.5% 3.2%
Inflation rates in the key Commonwealth countries have fallen dramatically
over the past 20 years. An important factor underpinning this development has
been the greater global focus by Governments and Central Banks on inflation
containment, particularly via the adoption of specific inflation targets or
ranges. Structural reforms have also played a key role, with an increased use of
technology and more flexible wage systems resulting in a more productive labor
force and a containment of costs. Further, this has all occurred within an
increasingly competitive global pricing environment. These developments are also
expected to ensure that inflation remains well contained for some considerable
time.
MONETARY POLICY (DOMESTIC CASH RATES)
CURRENT
1991 1995 (12/98)
AUSTRALIA 12.00% 7.50% 4.75%
CANADA 11.00% 5.50% 4.95%
NEW ZEALAND 12.30% 9.00% 3.38%
UNITED KINGDOM 14.00% 6.50% 6.00%
A more intense focus on inflation by global central banks kept real cash
rates higher over the early and mid 1990s. Signs that a new low inflation
environment has become entrenched has seen Commonwealth cash rates fall sharply
over the latter part of the decade as they have become a more flexible tool of
policy. Widespread emphasis on fiscal reform across Commonwealth markets has
also relieved some pressure from monetary policy.
10 YEAR BOND YIELDS
CURRENT
1991 1995 (12/98)
AUSTRALIA 12.05% 8.22% 5.02%
CANADA 10.30% 7.08% 4.91%
NEW ZEALAND 12.26% 7.23% 5.47%
UNITED KINGDOM 6.00% 7.42% 4.36%
Given the rapid price growth of the 1980s and early 1990s, inflationary
expectations--and hence longer term bond yields--took some time to adjust to the
lower inflation regime. Ten year Commonwealth bond yields are now, however,
close to or below 5%, factoring in the belief that inflation will remain well
contained in the medium term. This lower inflation outlook provides a solid
valuation anchor for Commonwealth bonds. In addition, the process of fiscal
reform has reduced the call of Commonwealth Governments on their respective bond
markets, reducing supply and, as a result, bond yields.
A-9
APPENDIX B
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa 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 fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than 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 sometime 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 payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements because
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 marked
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.
Unrated: When no rating has been assigned or when no rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
B-1
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 data to permit a judgment to be formed; if a
bond is called for redemptions; or for other reasons.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. 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.
STANDARD & POOR'S CORPORATION
AAA: Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in the higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB: Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B: Bonds rated B have a greater vulnerability to default but currently have
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
CCC: Bonds rated CCC have a currently identifiable vulnerability to default,
and are dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, they are not likely to pay
interest and repay principal.
Plus (+) or Minus (-) The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
B-2
APPENDIX C
NEW INVESTMENT OBJECTIVES AND POLICIES
If Proposals 4(A), 4(B), 4(C), 4(D), and 4(E) are approved by shareholders,
the Fund's investment objectives, investment policies and investment
restrictions would read in their entirety as follows:
INVESTMENT OBJECTIVES AND POLICIES
The Fund's principal investment objective is to provide high current income
by investing primarily in fixed-income securities denominated in the
Commonwealth Currencies. As a secondary investment objective, the Fund seeks
capital appreciation, but only when consistent with its principal investment
objective. The Fund's investment objectives, the Fund's policies with respect to
the credit quality of its assets set forth below and the limitations set forth
below in "Investment Restrictions" are fundamental policies that may not be
changed without the approval of a majority of the Fund's outstanding voting
securities. A "majority of the Fund's outstanding voting securities" means the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are represented, or (ii) more than 50% of the
outstanding shares.
The Investment Manager will select fixed-income securities which, in the
Investment Manager's judgment, will achieve the Fund's investment objectives.
With respect to investments denominated in the currencies of Australia, New
Zealand and Asian countries, the Investment Manager will base such selections
primarily upon the recommendation of the Investment Adviser. In recommending and
selecting investments for the Fund, the Investment Manager's and Investment
Adviser's personnel will draw on their substantial experience in managing
portfolios with investments in debt securities traded in Australia, Canada, New
Zealand and the United Kingdom and on their relationships with such entities as
CBIC Wood Gundy Inc.
PORTFOLIO STRUCTURE
Except in anticipation of dividend or other payments to be made in U.S.
dollars, it is expected that normally at least 65% of the Fund's total assets
will be invested in a portfolio of debt securities denominated in the
Commonwealth Currencies, namely, the Australian Dollar, the Canadian Dollar, the
New Zealand Dollar and the Pound Sterling or any successor currency. The Fund
will, under normal circumstances, invest in debt securities denominated in at
least three of these currencies and will not hold more than 50% of its assets in
any one Commonwealth Currency.
The Fund may invest the balance of its assets (1) in the securities of
Developed Market and/or Emerging Market issuers, including securities issued by
Developed Market or Emerging Market governmental entities, as well as by banks,
companies and other entities which are located in Developed Market or Emerging
Market countries, whether or not denominated in the currency of the Developed
Market or Emerging Market country, and (2) in debt securities of other issuers,
denominated in, or linked to, the currency of a Developed Market or Emerging
Market country, including securities issued by supranational issuers, such as
The World Bank, and derivative debt securities that replicate, or substitute
for, the currency of a Developed Market or Emerging Market country. The maximum
exposure to any one Developed Market country or currency is limited to 25% of
the Fund's total assets. The maximum exposure to any Emerging Market country or
currency is limited to 15% of the Fund's total assets.
C-1
The Fund may, with respect to the Global Debt Securities portion of its
portfolio, use derivatives to manage currency and interest rate risk and as a
substitute for, or to replicate, physical securities. The Fund may also use
derivatives with respect to its investments denominated in Commonwealth
Currencies to manage interest rate risk through investing in exchange traded
interest rate derivatives.
Subject to the limitations set forth in Section 12(d) of the Investment
Company Act of 1940, the Fund may invest up to 10% of its total assets in equity
securities issued by other investment companies whose securities are registered
under the 1940 Act and whose investment objective is to invest primarily in
fixed-income securities.
The market value weighted average of the Fund's investments (or the issuers
of those investments) will be rated not less than A2 by Moody's, or A by S&P, or
comparably rated by another appropriate nationally or internationally recognized
rating agency, or, if unrated, judged by the Investment Manager to be of
equivalent quality. Up to 15% of the Fund's investments (or the issuers of those
investments) may be rated below investment grade at the time of investment; that
is rated below Baa3 by Moody's or BBB- by S&P, or comparably rated by another
appropriate nationally or internationally recognized rating agency, or if
unrated, judged by the Investment Manager to be of equivalent quality. All of
the Fund's investments (or the issuers of those investments) must be rated, at
the time of investment, B3 or better by Moody's, or B- or better by S&P, or
comparably rated by another appropriate nationally or internationally recognized
rating agency, or if unrated, judged by the Investment Manager to be of
equivalent quality.
The Fund will not concentrate investments in any one industry except that
the Fund will concentrate, under normal market conditions, more than 25% of its
assets in debt securities issued or guaranteed by the governments, territories,
provinces and states of Australia, Canada, New Zealand the United Kingdom taken
as a group (and their instrumentalities and agencies, including government-owned
entities).
The Fund believes it is appropriate to treat all of the governments of the
four countries as a separate industry or group of related industries because of
the commonality of economic and political characteristics and risk levels among
the four Commonwealth countries, including similar constitutional, legal and
financial systems.
During periods when, in the Investment Manager's judgment, changes in the
markets of Australia, Canada, New Zealand, or the United Kingdom or other
economic conditions warrant, or to meet liquidity or distribution requirements,
the Fund may invest without limit in U.S. Government securities and short-term
debt obligations of U.S. banks and corporations rated not less than Aa or Prime
2 by Moody's or AA or A-2 by S&P for temporary defensive purposes. Although P-2
and A-2 ratings denote issuers with a strong (Moody's) or satisfactory (S&P)
ability to repay short-term debt in a timely manner, the relative degree of
safety is not as high as the very highest rating categories. In addition, the
Fund may enter into repurchase agreements and lending agreements involving these
securities.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies of the Fund, which
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities. If a percentage restriction on investment
or use of assets set forth below is adhered to at the time a transaction is
effected, later changes in percentage resulting from changing values will not be
considered a violation.
C-2
The Fund may not:
1. Purchase securities on margin, except such short-term credits as may be
necessary or routine for the clearance or settlement of transactions and except
that the Fund may engage in transactions in options on foreign currencies and
forward contracts and post margin in connection therewith consistent with its
investment policies.
2. Make short sales of securities or maintain a short position (other than
with respect to the use of derivatives).
3. Issue senior securities except (i) insofar as the Fund may be deemed to
have issued a senior security in connection with any repurchase or securities
lending agreement or any borrowing permitted by these investment restrictions,
and (ii) that the Fund may issue one or more series of a class of preferred
shares pursuant to its Articles.
4. Borrow money, or pledge, hypothecate, mortgage or otherwise encumber its
assets, except that the Fund may borrow for temporary or emergency purposes, if
after such borrowing there is asset coverage of at least 300% as defined in the
1940 Act. For the purposes of this restriction, collateral arrangements with
respect to transactions in options on foreign currencies and forward contracts
are not deemed a pledge of assets or the issuance of a senior security.
5. Purchase any security (except as provided below) if as a result more
than 25% of the total value of its assets would then be invested in securities
of issuers in a particular industry, except that the Fund will, under normal
circumstances, invest more than 25% of its assets in securities issued or
guaranteed by the governments, territories, provinces or states of Australia,
Canada, New Zealand and the United Kingdom (and their instrumentalities and
agencies, including government-owned entities) or repurchase agreements with
respect thereto. This restriction does not apply to securities issued or
guaranteed by the U. S. Government or its agencies and instrumentalities (or
repurchase agreements with respect thereto).
6. Make loans except through the purchase of debt obligations and the
entering into of repurchase and securities lending agreements in accordance with
the Fund's investment objectives and policies.
7. Act as an underwriter of other issuer's securities (except to the extent
the Fund may be deemed to be an underwriter in connection with the sale of
securities in the Fund's investment portfolio).
8. (i) Purchase or sell real estate, except that it may purchase and sell
mortgage-backed securities, debt securities issued by real estate investment
trusts, and debt securities of companies which deal in real estate or interests
therein, (ii) purchase or sell commodities (other than transactions in foreign
currencies and forward currency contracts or derivatives in accordance with the
Fund's investment objectives and policies) or (iii) invest in interests in oil,
gas, or other mineral exploration or development programs, except that it may
purchase and sell debt securities of companies that deal in oil, gas or other
mineral exploration or development programs.
C-3
PROXY THE FIRST COMMONWEALTH FUND, INC. PROXY
THIS PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Annual Meeting of Shareholders -- March 26, 1999
The undersigned hereby appoints Sir Roden Cutler, Brian M. Sherman and
Laurence S. Freedman, and each of them, the proxies of the undersigned, with
power of substitution to each of them, to vote all shares of the common stock
of The First Commonwealth Fund, Inc. which the undersigned is
entitled to vote at the Annual Meeting of Shareholders of The First
Commonwealth Fund, Inc. to be held at One Seaport Plaza, New York, New York
on March 26, 1999 at 2:00 p.m., New York City time, and at any adjournment or
postponement thereof.
- -------------------------------------------------------------------------------
PLEASE VOTE, DATE AND SIGN ON REVERSE AND
RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Please sign exactly as your name(s) appear(s) on the books of the Fund. Joint
owners should each sign personally. Trustees and other fiduciaries should
indicate the capacity in which they sign, and where more than one name
appears, a majority must sign. If a corporation, this signature should be
that of an authorized officer who should state his or her title.
- -------------------------------------------------------------------------------
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- ----------------------------------- -------------------------------------
- ----------------------------------- -------------------------------------
- ----------------------------------- -------------------------------------
PLEASE MARK VOTES
AS IN THIS EXAMPLE
- ---------------------------------------------------------------------------
THE FIRST COMMONWEALTH FUND, INC.
- ---------------------------------------------------------------------------
UNLESS OTHERWISE SPECIFIED IN THE BOXES PROVIDED, THE UNDERSIGNED'S VOTE WILL
BE CAST FOR ITEMS (1),(3),4(A),4(B),4(C),4(D) AND 4(E).
Mark box at right if an address change or comment has been noted on the
reverse side of this card / /
-----------------------
Please be sure to sign and date this Proxy. Date
- ------------------------------------------------------------------------------
_______Shareholder sign here ________________ Co-owner sign here ____________
(1). The elction of four Directors to serve as Class I Directors for a three-
year term:
For All With- For All
DAVID L. ELSUM Nominees hold Except
LAURENCE S. FREEDMAN
DAVID MANOR / / / / / /
E. DUFF SCOTT
NOTE: IF YOU DO NOT WISH YOUR SHARES VOTED "FOR" A PARTICULAR NOMINEE,
MARK THE "FOR ALL EXCEPT" BOX AND STRIKE A LINE THROUGH THE NAME(S) OF
THE NOMINEE(S). YOUR SHARES WILL BE VOTED FOR THE REMAINING NOMINEE(S).
For Against Abstain
(3). Ratification of the selection of
PricewaterhouseCoopers LLP as independent
public accountants. / / / / / /
4(A). Approval of amendments to the Fund's
investment policies to allow the Fund
to invest up to 35% of its total assets
in Global Debt Securities. / / / / / /
4(B). Approval of amendments to the Fund's
principal investment objective and
investment policies regarding investments
in high grade-fixed-income securities. / / / / / /
4(C). Approval of an amendment to the Fund's
investment policies to allow the Fund to
invest up to 15% of its total assets in
debt securities rated, or judged by the
Investment Manager to be, below investment
grade at the time of investment. / / / / / /
4(D). Approval of an amendment to the Fund's
investment policies to allow the Fund
to invest in equity securities issued by
certain U.S. registered investment
companies. / / / / / /
4(E). Approval of amendments to the Fund's
investment policies and investment
restrictions to allow the Fund to use
derivatives. / / / / / /
The appointed proxies will vote in their discretion on any other
business as may properly come before the meeting or any adjournments or
postponements thereof.
RECORD DATE SHARES:
PROXY THE FIRST COMMONWEALTH FUND, INC. PROXY
THIS PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Annual Meeting of Shareholders -- March 26, 1999
The undersigned hereby appoints Sir Roden Cutler, Brian M. Sherman and
Laurence S. Freedman, and each of them, the proxies of the undersigned, with
power of substitution to each of them, to vote all shares of the Auction
Market Preferred Stock, Series W-7, of The First Commonwealth Fund, Inc.
which the undersigned is entitled to vote at the Annual Meeting of
Shareholders of The First Commonwealth Fund, Inc. to be held at One Seaport
Plaza, New York, New York on March 26, 1999 at 2:00 p.m., New York City time,
and at any adjournment or postponement thereof.
- -------------------------------------------------------------------------------
PLEASE VOTE, DATE AND SIGN ON REVERSE AND
RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Please sign exactly as your name(s) appear(s) on the books of the Fund. Joint
owners should each sign personally. Trustees and other fiduciaries should
indicate the capacity in which they sign, and where more than one name
appears, a majority must sign. If a corporation, this signature should be
that of an authorized officer who should state his or her title.
- -------------------------------------------------------------------------------
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- ----------------------------------- -------------------------------------
- ----------------------------------- -------------------------------------
- ----------------------------------- -------------------------------------
PLEASE MARK VOTES
AS IN THIS EXAMPLE
- ---------------------------------------------------------------------------
THE FIRST COMMONWEALTH FUND, INC.
- ---------------------------------------------------------------------------
AUCTION MARKET PREFERRED STOCK
SERIES W-7
UNLESS OTHERWISE SPECIFIED IN THE BOXES PROVIDED, THE UNDERSIGNED'S VOTE WILL
BE CAST FOR ITEMS (2),(3),4(A),4(B),4(C),4(D) AND 4(E).
Mark box at right if an address change or comment has been noted on the
reverse sie of this card / /
-----------------------
Please be sure to sign and date this Proxy. Date
- ------------------------------------------------------------------------------
_______Shareholder sign here ________________ Co-owner sign here ____________
(2). The elction of two Directors to represent the interest of Preferred
Stock for the ensuing year.
Nominees: For All With- For All
Nominees hold Except
MICHAEL R. HORSBURGH
DR. ANTON E. SCHRAFL / / / / / /
INSTRUCTION TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL, MARK THE
"FOR ALL EXCEPT" BOX AND STRIKE A LINE THROUGH THE NAME OF THE NOMINEE
IN THE LIST ABOVE.
For Against Abstain
(3). Ratification of the selection of
PricewaterhouseCoopers LLP as independent
public accountants. / / / / / /
4(A). Approval of amendments to the Fund's
investment policies to allow the Fund
to invest up to 35% of its total assets
in Global Debt Securities. / / / / / /
4(B). Approval of amendments to the Fund's
principal investment objective and
investment policies regarding investments
in high grade-fixed-income securities. / / / / / /
4(C). Approval of an amendment to the Fund's
investment policies to allow the Fund to
invest up to 15% of its total assets in
debt securities rated, or judged by the
Investment Manager to be, below investment
grade at the time of investment. / / / / / /
4(D). Approval of an amendment to the Fund's
investment policies to allow the Fund
to invest in equity securities issued by
certain U.S. registered investment
companies. / / / / / /
4(E). Approval of amendments to the Fund's
investment policies and investment
restrictions to allow the Fund to use
derivatives. / / / / / /
The appointed proxies will vote in their discretion on any other
business as may properly come before the meeting or any adjournments or
postponements thereof.
RECORD DATE SHARES: