-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rwb4Z6LO9EUYR1sQe9qX7hbeId5iDAD8ANEi1piNcE8f4pPBmgMMp1h+nmfHVoG7 urUSkiQhI+JDKRNToT8tAw== 0000903893-96-000141.txt : 19960411 0000903893-96-000141.hdr.sgml : 19960411 ACCESSION NUMBER: 0000903893-96-000141 CONFORMED SUBMISSION TYPE: N14AE24 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960410 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GMO TRUST CENTRAL INDEX KEY: 0000772129 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: N14AE24 SEC ACT: 1933 Act SEC FILE NUMBER: 333-02399 FILM NUMBER: 96545760 BUSINESS ADDRESS: STREET 1: 40 ROWES WHARF CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6173307500 FORMER COMPANY: FORMER CONFORMED NAME: GMO CORE TRUST DATE OF NAME CHANGE: 19900927 N14AE24 1 FORM N-14 As filed with the Securities and Exchange Commission on April 10, 1996 Registration No. -------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X| Pre-Effective Amendment No. |_| Post-Effective Amendment No. |_| (Check appropriate box or boxes) --------------------------- GMO TRUST (Exact Name of Registrant as Specified in Charter) 40 Rowes Wharf, Boston, MA 02110 (Address of Principal Executive Offices) (617) 330-7500 (Area Code and Telephone Number) --------------------------- WILLIAM R. ROYER, General Counsel GMO TRUST 40 Rowes Wharf, Boston, MA 02110 (Name and address of Agent for Service) --------------------------- Copy to: JOSEPH B. KITTREDGE, JR., Esq. Ropes & Gray One International Place Boston, Massachusetts 02110 --------------------------- Approximate Date of Proposed Public Offering: As soon as practicable after this Registration Statement becomes effective. --------------------------- It is proposed that the filing become effective on May 10, 1996 pursuant to Rule 488. --------------------------- An indefinite amount of the Registrant's securities has been registered under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940. In reliance upon such Rule, no filing fee is being paid at this time. The Registrant intends to file a Rule 24f-2 Notice for its fiscal year ended February 29, 1996 on or about April 26, 1996. GMO TRUST CROSS-REFERENCE SHEET (AS REQUIRED BY RULE 481(A))
FORM N-14 ITEM NO. PART A CAPTION IN PROSPECTUS/PROXY STATEMENT 1. Cross-Reference Sheet; Front Cover 2. Table of Contents 3. Synopsis; Expense Summary; Risk factors 4. Approval or disapproval of the transaction 5. Information about GMO Trust -- Incorporated by reference to specified documents 6. Information about The Common Fund 7. Approval or disapproval of the transaction: Required vote; Other 8. Other 9. Not Applicable PART B CAPTION IN STATEMENT OF ADDITIONAL INFORMATION 10. Cover Page 11. Cover Page -- Incorporated by reference to specified documents 12. Cover Page -- Incorporated by reference to specified documents 13. Cover Page -- Incorporated by reference to specified documents 14. Financial Statements
PART C The information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this Registration Statement. Table of Contents A Message from the President................................................ Notice of Shareholder meeting............................................... Combined Prospectus/Proxy Statement......................................... PROXY CARD ENCLOSED Grantham, Mayo, Van Otterloo & Co. [LOGO] A MESSAGE FROM THE INVESTMENT MANAGER Dear Member: Enclosed you will find several documents relating to the Special Meeting of Members of The Common Fund for Nonprofit Organizations ("The Common Fund") that own units in The Common Fund's GMO International Equities Pool (the "GMO Pool") to be held June , 1996 at [ ]. I hope you will give this material your immediate attention and that, if you cannot attend the meeting in person, you will vote your proxy promptly. The International Equity Committee of the Trustees of The Common Fund (the "Committee") is recommending that the member institutions that own units of the GMO Pool (the "Unitholders") approve a transaction involving, in essence, the reorganization of the GMO Pool as GMO Foreign Fund (the "Mutual Fund"), a newly formed series of GMO Trust, a registered open-end management investment company through (i) the discontinuation of the GMO Pool and the distribution of all the assets and liabilities of the GMO Pool to Unitholders and (ii) the exchange, immediately thereafter, of the assets and liabilities distributed for shares of the Mutual Fund. At the close of the transaction the assets and liabilities of the Mutual Fund will consist entirely of the assets and liabilities formerly held in the GMO Pool and the shareholders of the Mutual Fund will consist entirely of the former Unitholders of the GMO Pool. The investment manager to both the GMO Pool and the Mutual Fund is Grantham, Mayo, Van Otterloo & Co. ("GMO"). It is intended that GMO will manage the Mutual Fund in a manner substantially identical to the manner in which it currently manages the GMO Pool. A Unitholder of the GMO Pool is not entitled to payment for and an appraisal of its GMO Pool units if the transaction is consummated over the objection of such Unitholder. The Common Fund, however, will accept redemption requests up to May 29, 1996 of those Unitholders that do not wish to participate in the transaction. Such redemptions will be effected as of May 31, 1996. Unitholders not electing to redeem units will participate in the transaction. The Committee believes that this transaction will offer Unitholders of the GMO Pool an opportunity to continue to benefit from GMO's management in a substantially similar investment program. THE COMMITTEE BELIEVES THAT THE PROPOSED TRANSACTION WITH THE MUTUAL FUND IS IN THE BEST INTERESTS OF UNITHOLDERS AND RECOMMEND THAT YOU VOTE IN FAVOR OF IT. A Notice of Special Meeting of Unitholders, a Prospectus/Proxy Statement relating to the proposed reorganization, the current Prospectus of GMO Trust, an application form for the Mutual Fund, and form of proxy are enclosed. Please read them carefully. If you are unable to attend the meeting in person, we urge you to sign, date and return the proxy card so that your units may be voted in accordance with your instructions. Your vote is important to us. We appreciate the time and consideration I am sure you will give this important matter. If you have questions about the proposal, please call 1-617-330-7500. Sincerely yours, (signature of Eyk H.A. Van Otterloo) Eyk H.A. Van Otterloo THE COMMON FUND FOR NONPROFIT ORGANIZATIONS NOTICE OF SPECIAL MEETING OF UNITHOLDERS OF THE GMO INTERNATIONAL EQUITIES POOL To the Unitholders of the GMO International Equities Pool of The Common Fund for Nonprofit Organizations: NOTICE IS HEREBY GIVEN that a Special Meeting of Unitholders of the GMO International Equities Pool of The Common Fund for Non-Profit Organizations (the "GMO Pool") will be held on ________, June __, 1996 at _____ at ____________________________________ to consider the following: 1. To vote upon the approval of a transaction involving, in essence, the reorganization of the GMO Pool as GMO Foreign Fund, a newly formed series of GMO Trust, a registered, open-end management investment company (the "Mutual Fund") pursuant to an Agreement and Plan of Reorganization which provides that (i) the GMO Pool will be discontinued and its assets and liabilities will be distributed pro rata to the Unitholders as a liquidating distribution, and (ii) such assets and liabilities will immediately thereafter be transferred by the Unitholders to the Mutual Fund in exchange for shares of the Mutual Fund. 2. To transact such other business as may properly come before the meeting. The International Equity Committee of the Trustees have fixed the close of business on April __, 1996 as the record date for determination of Unitholders entitled to notice of, and to vote at, the Special Meeting. By order of the Trustees [Name] Secretary WE URGE YOU TO MARK, SIGN, DATE, AND MAIL THE ENCLOSED PROXY IN THE POSTAGE-PAID ENVELOPE PROVIDED SO THAT YOU WILL BE REPRESENTED AT THE SPECIAL MEETING. April , 1996 PROSPECTUS/PROXY STATEMENT April , 1996 TABLE OF CONTENTS Synopsis............................................................... Risk Factors........................................................... Expense Summary........................................................ Approval or Disapproval of the Transaction............................. Additional Information about the GMO Pool and the Foreign Mutual Fund.. Other.................................................................. Agreement and Plan of Reorganization ..................................Exhibit A This document will give you the information you need to vote on the proposed transaction involving the GMO International Equities Pool of The Common Fund for Nonprofit Organizations (the "GMO Pool"), located at 450 Post Road East, Westport, Connecticut 06881, having a phone number of 1-800-xxx-xxxx, and GMO Foreign Fund, a series of GMO Trust (the "Mutual Fund"), located at 40 Rowes Wharf, Boston, Massachusetts 02110, having a phone number of 1-617-330-7500. Much of the information is required under rules of the Securities and Exchange Commission (the "SEC"); some of it is technical. If there is anything you do not understand, please contact Grantham, Mayo, Van Otterloo & Co. ("GMO") at 1-617-330-7500. This Prospectus/Proxy Statement is furnished in connection with the solicitation of proxies by and on behalf of the International Equity Committee of the Trustees (the "Committee") of The Common Fund for Nonprofit Organizations ("The Common Fund") for use at the Special Meeting (the "Meeting") of the Members of The Common Fund that own units in the GMO Pool (the "Unitholders") to be held on June 3, 1996 at ____ a.m. at the _________________________, and at any adjournment or adjournments thereof. This Prospectus/Proxy Statement and the enclosed form of proxy are being mailed to Unitholders on or about May 10, 1996. At the Meeting, Unitholders will vote to approve or disapprove the reorganization of the GMO Pool as the Mutual Fund through the discontinuation of the GMO Pool and the distribution of all its assets and liabilities to the Unitholders, and the transfer immediately thereafter by Unitholders of the assets and liabilities distributed in exchange for shares of the Mutual Fund. Only Unitholders of record on May 1, 1996 (the "Record Date") will be entitled to notice of and to vote at the Meeting. As of the Record Date, there were outstanding _____ units of beneficial interest of the GMO Pool held by ______ Unitholders. This Prospectus/Proxy Statement explains concisely what you should know before investing in the Mutual Fund. Please read it and keep it for future reference. This Prospectus/Proxy Statement is accompanied by the Prospectus of GMO Trust dated February 29, 1996 (the "GMO Prospectus"). The GMO Prospectus contains information about the Mutual Fund and is incorporated into this Prospectus/Proxy Statement by reference. -1- The following documents have been filed with the Securities and Exchange Commission and are also incorporated into this Prospectus/Proxy Statement by reference: (i) the Statement of Additional Information of GMO Trust dated February 29, 1996 (the "GMO Statement of Additional Information"), and (ii) a Statement of Additional Information dated May __, 1996 relating to the transactions described in this Prospectus/Proxy Statement (the "Reorganization Statement of Additional Information"). For a free copy of the GMO Prospectus, the GMO Statement of Additional Information or the Reorganization Statement of Additional Information please contact GMO at 1-800-XXX-XXXX. The Committee knows of no matters other than those set forth herein to be brought before the Meeting. If, however, any other matters properly come before the Meeting, it is the Committee's intention that proxies will be voted on such matters in accordance with the judgment of the persons named in the enclosed form of proxy. Proxy materials, reports and proxy and information statements and other information filed by GMO Trust can be inspected and copied at the Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also be obtained from the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, Washington, D.C. 20549 at prescribed rates. THE SECURITIES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -2- I. SYNOPSIS PROPOSED TRANSACTION. The GMO Pool is a fund of The Common Fund, a nonprofit membership corporation operated by and for its member colleges, universities, and independent schools. The Mutual Fund is a newly formed series of GMO Trust, a registered open-end management investment company. The GMO Pool is managed, and the Mutual Fund will be managed, by GMO. The Committee has unanimously approved a transaction (the "Transaction") involving, in essence, the reorganization of the GMO Pool as the Mutual Fund, whereby (i) the GMO Pool will be discontinued and its assets and liabilities will be distributed pro rata to the Unitholders as a liquidating distribution, and (ii) such assets and liabilities will immediately thereafter be transferred by the Unitholders to the Mutual Fund in exchange for shares of the Mutual Fund. At the completion of the Transaction the assets and liabilities of the Mutual Fund will consist entirely of the assets and liabilities held in the GMO Pool immediately prior to the Transaction, and the shareholders of the Mutual Fund will consist entirely of the Unitholders of the GMO Pool immediately prior to the Transaction, with identical respective ownership interests. GMO intends to manage the Mutual Fund in a manner substantially identical to the way in which it currently manages the GMO Pool. The Committee unanimously recommends that Unitholders of the GMO Pool approve the Transaction because it offers Unitholders the opportunity to continue to benefit from GMO's management in a substantially similar investment program. See "Approval or Disapproval of the Transaction." CERTAIN TAX CONSEQUENCES OF THE REORGANIZATION. None of the Unitholders will incur any federal income tax liability in connection with the Transaction, provided that neither their investment in The Common Fund nor the assets received by the Unitholders in liquidation of the GMO Pool was debt-financed. COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS. The investment objectives, policies and restrictions of the GMO Pool and the Mutual Fund are substantially similar. The GMO Pool invests, and the Mutual Fund will invest, largely in a portfolio of common stocks and securities convertible into stocks of companies domiciled outside the United States. The GMO Pool utilizes, and the Mutual Fund will utilize, a fundamental analysis of companies and countries to select securities in which to invest. Differences between the investment objectives, policies and restrictions of the two funds relate almost exclusively to small differences in the amount that each fund may invest in certain types of securities. See "Additional Information about the Mutual Fund and the GMO Pool -- Comparison of Investment Objectives, Policies and Restrictions." -3- COMPARISON OF DISTRIBUTION, PURCHASE, REDEMPTION AND EXCHANGE PROCEDURES. Shares of the Mutual Fund may be purchased or redeemed on any day when the New York Stock Exchange is open for business (a "business day") while units of the GMO Pool may only be purchased or redeemed one day per month. See "Additional Information about the Mutual Fund and the GMO Pool -- Comparison of Distribution, Purchase, Redemption and Exchange Procedures." II. EXPENSE SUMMARY The following tables summarize expenses (i) that the GMO Pool has incurred in its past fiscal year, and (ii) that the Mutual Fund expects to incur in its current fiscal year after giving effect to the Transaction on a pro forma combined basis as if the Transaction had occurred as of April 1, 1996. The Examples show the estimated cumulative expenses attributable to a hypothetical $1,000 investment over specified periods. -4- Current Expenses Pro Forma Expenses GMO Pool Mutual Fund UNITHOLDER/SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Charge 0 0 Imposed on Purchases Maximum Deferred Sales 0 0 Charge ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets) Management Fees .70% .57%1 Other Expenses .13% .18% Total Fund Operating Expenses .83% .75%1 The tables are provided to help you understand an investor's share of the operating expenses which each fund incurs. EXAMPLES An investment of $1,000 would incur the following expenses, assuming (1) 5% annual return and (2) no redemption at the end of each period: 1 3 5 10 year years years years GMO POOL $8 $26 $46 $103 - -------- 1 GMO has voluntarily undertaken to reduce its management fees and to bear certain expenses with respect to the Mutual Fund until further notice to the extent that the Mutual Fund's total annual operating expenses (excluding brokerage commissions, extraordinary expenses (including taxes), securities lending fees and expenses and transfer taxes) would otherwise exceed .75% of the Mutual Fund's daily net assets. Therefore, so long as GMO agrees so to reduce its fee and bear certain expenses, total annual operating expenses (subject to such exclusions) of the Mutual Fund will not exceed .75% of the Mutual Fund's daily net assets. -5- MUTUAL FUND $8 $24 MUTUAL FUND $8 $24 (PRO FORMA COMBINED) The Examples do not represent past or future expense levels. Actual expenses may be greater or less than those shown. Federal regulations require the Examples to assume a 5% annual return, but actual annual return will vary. Federal regulations require that the Mutual Fund, as a newly formed fund, display examples of expenses for one and three years only. III. RISK FACTORS Because the GMO Pool and the Mutual Fund share similar investment objectives and policies, the risks of an investment in the Mutual Fund as described below are similar to the risks of an investment in the GMO Pool. A more detailed description of certain of the risks associated with an investment in the Mutual Fund is contained in the GMO Prospectus. FOREIGN INVESTMENTS--GENERAL. Investment in foreign issues or securities principally traded overseas involves certain special risks due to the economic, political and legal developments in foreign countries. These risks include unfavorable changes in currency exchange rates, lack of information about the issuer, and lack of liquidity of the securities of the issuer. Foreign brokerage commissions and other fees are also generally higher than in the United States. Investors should also be aware that under certain circumstances, markets which are perceived to have similar characteristics to troubled markets may be adversely affected whether or not similarities actually exist. A complete description of the risks associated with foreign securities is included in the GMO Prospectus on page 31. FOREIGN INVESTMENTS--EMERGING MARKETS. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the United States and developed foreign markets. Many emerging markets have experienced substantial rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have very negative effects on the securities markets of certain emerging countries. The economies of emerging markets are particularly susceptible to downturns because of (i) the risk of trade barriers and other protectionist measures, (ii) their reliance on only a few industries or commodities, and (iii) their dependence on the economic conditions of the countries with which they trade. In addition, custodial services and other costs relating to investment in foreign markets may be more expensive in emerging markets than in many developed foreign markets. A complete description of the risks associated with emerging markets is included in the GMO Prospectus on page 31. -6- OPTIONS AND FUTURES TRANSACTIONS. The Mutual Fund's use of options and futures transactions involves certain risks, including the risks that the Mutual Fund will be unable at times to close out such positions, that such transactions may not accomplish their purpose because of imperfect market correlations, or that GMO may not forecast market movements correctly. A complete description of the risks associated with options and futures transactions is included in the GMO Prospectus on pages 32-36. OTHER INVESTMENT PRACTICES. To the extent that the Mutual Fund exercises its ability to engage in certain investment practices, such as repurchase agreements and securities lending, it may be delayed in recovering or unable to recover its collateral in the event of default by the other party. In the case of securities purchased for future delivery, the Mutual Fund runs the risk of a decline in the value of such securities before the settlement date and the risk that the other party should default on its obligation. A complete description of the risks associated with other investment practices is included in the GMO Prospectus on pages 31-42. IV. APPROVAL OR DISAPPROVAL OF THE TRANSACTION The Unitholders of the GMO Pool are being asked to approve or disapprove the Transaction, which involves, in essence, the reorganization of the GMO Pool as the Mutual Fund. The Transaction is proposed to be effected pursuant to an Agreement and Plan of Reorganization between The Common Fund, on behalf of the GMO Pool, and GMO Trust, on behalf of the Mutual Fund, dated as of _______ , 1996 (the "Agreement"), a copy of which is attached to this Prospectus/Proxy Statement as Exhibit A. AGREEMENT AND PLAN OF REORGANIZATION. The Agreement provides that the GMO Pool will be discontinued and its assets and liabilities will be distributed to Unitholders. Each Unitholder will receive a portion of such assets and liabilities proportional to such Unitholder's ownership share of the GMO Pool. Immediately following the distribution, each Unitholder will transfer the assets and liabilities distributed to it to the Mutual Fund for shares of the Mutual Fund representing an identical relative ownership interest in the Mutual Fund as was previously held in the GMO Pool. Prior to this exchange, the Mutual Fund will not hold any assets or liabilities. Following the exchange, therefore, the assets and liabilities of the Mutual Fund will consist entirely of those assets and liabilities formerly held by the GMO Pool. The consummation of the Transaction is subject to the conditions set forth in the Agreement. The Agreement may be terminated and the Transaction abandoned at any time before its consummation, before or after approval by the Unitholders, by mutual consent of the GMO Pool and the Mutual Fund or, if any condition set forth in the Agreement has not been fulfilled and has not been waived by the party entitled to its benefits, by such party. All fees and expenses, including legal and accounting expenses, portfolio transfer taxes (if any) or other similar expenses incurred in connection with the consummation of the Transaction will be borne by GMO. -7- DESCRIPTION OF THE SHARES OF THE MUTUAL FUND. Full and fractional shares of the Mutual Fund will be issued to the Unitholders of the GMO Pool in accordance with the procedure under the Agreement as described above. Shares of the Mutual Fund are freely transferrable, are entitled to dividends as declared by the Trustees of GMO Trust, and, in liquidation of GMO Trust, are entitled to receive the net assets of the Mutual Fund, but not of any other series of GMO Trust. Unitholders receiving Mutual Fund shares in the Transaction will not pay a sales charge on such shares. Shares of the Mutual Fund are not subject to redemption fees or 12b-1 fees. GMO Trust has an unlimited authorized number of shares of beneficial interest which may, without shareholder approval, be divided into an unlimited number of series of such shares, and which are presently divided into twenty-four series of shares. Shares of the Mutual Fund represent one such series. The shares of GMO Trust are entitled to vote at any meetings of shareholders. GMO Trust does not generally hold annual meetings of shareholders and will do so only when required by law. Matters submitted to shareholder vote must be approved by each series separately except (i) when the Investment Company Act of 1940 requires that shares shall be voted together as a single class, and (ii) when the Trustees determine that only shareholders of the series affected shall be entitled to vote on the matter. Shareholders who hold a majority of the outstanding shares may remove Trustees of GMO Trust from office by votes cast in person or by proxy at a meeting of shareholders or by written consent. Under Massachusetts law, shareholders of the Mutual Fund could, under certain circumstances, be held personally liable for the obligations of GMO Trust. However, the Agreement and Declaration of Trust of GMO Trust (the "Declaration of Trust") disclaims shareholder liability for acts or obligations of GMO Trust and requires that notice of such disclaimer be given in each agreement, obligation, or instrument entered into or executed by GMO Trust. The Declaration of Trust provides for indemnification out of all the property of the relevant fund for all loss and expense of any shareholder of that fund held personally liable for the obligations of GMO Trust. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is considered remote since it may arise only in the very limited circumstances in which the disclaimer is inoperative and the fund of which he is or was a shareholder would be unable to meet its obligations. FEDERAL INCOME TAX CONSEQUENCES. As a condition to the GMO Pool's obligation to consummate the Transaction, the GMO Pool will receive an opinion from Ropes & Gray, counsel to the Mutual Fund, to the effect that, on the basis of certain representations from the GMO Pool, none of the Unitholders will incur any federal income tax liability in connection with the Transaction, provided that neither their investment in The Common Fund nor the assets received by the Unitholders in liquidation of the GMO Pool was debt-financed. COMMITTEE'S RECOMMENDATION. The Committee unanimously approved the Transaction and unanimously recommends that Unitholders of the GMO Pool vote in favor of the Transaction. The principal reason why the Committee is recommending the approval of the Transaction is continued investment management by GMO. As of ________, 1996, GMO will no longer continue as a selected investment manager of The Common Fund. The Mutual Fund will allow Unitholders the opportunity to continue to benefit from GMO's management in a substantially similar investment program. -8- REQUIRED VOTE. Approval of the proposal requires the affirmative vote of both (A) two-thirds of the Members that own units in the GMO Pool and (B) Members holding two-thirds of all the outstanding units in the GMO Pool, in each case as of the Record Date. Unless revoked, all valid proxies will be voted in accordance with the specification thereon or, in the absence of specifications, FOR approval of the Transaction. A Unitholder of the GMO Pool objecting to the proposed Transaction is not entitled under New York law or the Constitution, By-laws or Rules of The Common Fund to demand payment for and an appraisal of its GMO Pool units if the Transaction is consummated over the objection of such Unitholder. The Common Fund, however, will accept redemption requests up to May 29, 1996 of those Unitholders that do not wish to participate in the Transaction. Such redemptions will be effected as of May 31, 1996. Unitholders not electing to redeem units by May 29, 1996 will participate in the Transaction if the required vote is obtained. In the event that this proposal is not approved by the Unitholders of the GMO Pool, the GMO Pool will continue to be managed as a separate fund of The Common Fund--by GMO initially--in accordance with its current investment objective and policies, and the Committee may consider such alternatives as may be in the best interests of the Unitholders. -9- VI. ADDITIONAL INFORMATION ABOUT THE MUTUAL FUND AND THE GMO POOL INFORMATION ABOUT THE MUTUAL FUND. For information about the Mutual Fund, please consult the GMO Prospectus, particularly at pages 20-21. INFORMATION ABOUT THE COMMON FUND. The Common Fund is a non-profit corporation that was organized in 1969 pursuant to a Special Act of the New York State Legislature in 1955 that authorized the creation of The Common Fund. The Common Fund began operations in 1971. The Common Fund is governed by a Board of Trustees who, except for the President, are elected for three-year staggered terms. Membership in The Common Fund is limited to educational institutions and educational support organizations. There were as of December 31, 1995 approximately 1,400 Members, of which approximately 920 were participating in the long term equity and bond investment funds of The Common Fund and more than 1,100 were participating in the intermediate and short term cash funds. The Common Fund offers a series of pooled investment funds, each of which has its own investment objectives, policies and strategies. For each investment fund, The Common Fund identifies investment strategies, allocates assets among those strategies, selects investment managers within each strategic category and allocates fund assets among them. The Common Fund then monitors manager performance, increasing and decreasing allocations and terminating and replacing managers as appropriate. Each Member selects the specific investment funds in which to invest its money. A Member may invest in more than one fund and may, if it chooses, have more than one account in any fund. Only after a Member chooses in which investment funds to invest does the Common Fund allocate the money within each investment fund as described above. The GMO Pool is an investment fund that invests in international equities. The GMO Pool is distinct from other investment funds of The Common Fund in that the GMO Pool has only one investment manager, GMO. The Common Fund, therefore, does not perform its usual function of allocating money between investment managers for the GMO Pool. The effect of this difference is that each Member has the option of choosing one investment Manager, GMO, to manage their investment. CAPITALIZATION. The following tables show the capitalization of the Mutual Fund and the GMO Pool as of April 1, 1996 and on a pro forma basis as of that date, giving effect to the proposed Transaction: -10- (UNAUDITED) Mutual GMO Fund Mutual Fund Pool (actual) (Pro Forma)* Net assets $537,347 $ 0 $ 537,347 (000's omitted) Shares or units 96,653 0 53,734,694 outstanding Net asset value 5,800 $ 0 10 per share or unit ($) * Pro Forma net assets reflect completion of the Transaction and legal and accounting costs related to the Transaction. COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS . The Mutual Fund's investment objectives, policies and restrictions are very similar to those of the GMO Pool. The GMO Pool invests, and the Mutual Fund will invest, primarily in a diversified portfolio of common stocks, securities convertible into common stocks and warrants to acquire common stocks of companies domiciled outside the United States. There are no prescribed limits on geographic asset distribution for either the GMO Pool or the Mutual Fund, and both have the authority to invest in securities of foreign issuers traded on U.S. exchanges and securities traded abroad, American Depository Receipts, European Depository Receipts and other similar securities convertible into securities of foreign issuers. Both funds base their investment strategy on a fundamental analysis of issuers and country economics. Both funds may emphasize capital appreciation or income depending on the views of the investment manager. In so doing, either fund may hold various amounts of growth stocks or value stocks. Both funds may hold cash, short-term obligations, and foreign government bonds (denominated in U.S. or foreign currencies). Both funds may also invest in corporate bonds of foreign issuers and of preferred stock of foreign issuers. The GMO Pool may invest in The Common Fund for Short Term Investments, a money market type instrument available only to investment funds in The Common Fund. -11- The Mutual Fund may invest only 20% of its assets in securities of issuers in emerging countries, while the GMO Pool has no limit as to what percentage of its assets it may invest the securities of issuers in emerging markets, although the GMO Pool has historically never exceeded a weighting of 20% for emerging market securities. Both funds may engage in foreign currency, stock index futures and options strategies for hedging the currency exposure of their portfolio securities. Neither fund is required to hedge its currency risk. The Mutual Fund's use of options is limited such that the premiums paid by it on all outstanding options it has purchased may not exceed 5% of its total assets. COMPARISON OF DISTRIBUTION, PURCHASE, REDEMPTION AND EXCHANGE PROCEDURES. The Mutual Fund will declare and pay the distributions of its dividends, interest and foreign currency gains semi-annually. The GMO Pool distributes all dividends, interest and other ordinary income of the fund quarterly, on an accrual basis. The Mutual Fund intends to distribute net short-term capital gains and net long-term gains at least annually. The GMO Pool does not distribute net short-term and long-term capital gains; instead, this appreciation or depreciation is reflected in the value of the units of the fund. Shares of the Mutual Fund may be purchased directly from GMO Trust on any business day. The purchase price of a share of the Mutual Fund is the net asset value next determined after a purchase order is received in "good order." Investors must submit an application to the manager of the fund and obtain the manager's acceptance before it will be considered "in good order." Investments in the GMO Pool may only be made on the first day of each calendar month and the funds must be received by the GMO Pool not later than the last business day preceding the respective entry date (or as the Trustees may otherwise decide). At least six business days' advance notice must be given for an investment in the GMO Pool. Shares of the Mutual Fund may be redeemed on any business day. The redemption price is the net asset value per share next determined after receipt of the redemption request. There is no separate redemption fee. A Unitholder in the GMO Pool may withdraw its investment in the fund by giving six business days' advance written notice of withdrawal to the GMO Pool or such shorter notice as The Common Fund may permit. Such withdrawal will only be effected on, or as of, a monthly valuation date (the last business day of the month). A Unitholder may transfer all the amount it has invested in the GMO Pool to any other fund of The Common Fund, by giving fourteen days advance written notice to The Common Fund. For additional information please see the GMO Prospectus. -12- OTHER INFORMATION. Other information relating to the Mutual Fund, including information in respect of its investment objectives and policies and financial history, may be found in the enclosed GMO Prospectus and in the GMO Statement of Additional Information. VI. OTHER RECORD DATE, QUORUM AND METHOD OF TABULATION. Unitholders of record of the GMO Pool at the close of business on the Record Date will be entitled to vote at the Meeting or any adjournment thereof. The holders of [ ] of the Units of the GMO Pool outstanding at the close of business on the Record Date present in person or represented by proxy will constitute a quorum for the Meeting; however, as noted earlier, the affirmative vote of (A) two-thirds of all Members owning units in the GMO Pool and (B) of Members owning two-thirds of all the units in the GMO Pool is necessary to approve the Transaction. Unitholders are entitled to one vote each, in the case of (A), and to one vote for each unit held, with fractional units voting proportionally, in the case of (B). Votes cast by proxy or in person at the meeting will be counted by persons appointed by The Common Fund as tellers for the Meeting. The tellers will count the total number of votes cast "for" approval of the Transaction for purposes of determining whether sufficient affirmative votes have been cast. The tellers will count units represented by proxies that reflect abstentions as units that are present and entitled to vote on the matter for purposes of determining the presence of a quorum. Abstentions have the effect of a negative vote on the proposal. OWNERSHIP OF THE GMO POOL AND THE MUTUAL FUND. The Common Fund permits only Members to own units in the various funds of The Common Fund. The officers and Trustees of The Common Fund, therefore, did not, as of the Record Date, own beneficially any units of the GMO Pool. As of the Record Date, to the best of the knowledge of The Common Fund, the following institutions owned beneficially 5% or more of the outstanding units of the GMO Pool: (to be filed by amendment) As of April __, 1996, there were no shares of the Mutual Fund issued or outstanding. SOLICITATION OF PROXIES. Solicitation of proxies by personal interview, mail, telephone, and telegraph may be made by employees and partners of GMO. REVOCATION OF PROXIES. Proxies, including proxies given by telephone, may be revoked at any time before they are voted by a written revocation received by the Secretary of The Common Fund, by properly executing a later-dated proxy or by attending the Meeting and voting in person. -13- ADJOURNMENT. If sufficient votes in favor of the proposal are not received by the time scheduled for the Meeting, the persons named as proxies may propose one or more adjournments of the Meeting for a period or periods of not more than 60 days in the aggregate to permit further solicitation of proxies. Any adjournment will require the affirmative vote of a majority of the units cast on the question in person or by proxy at the session of the Meeting to be adjourned. The persons named as proxies will vote in favor of such adjournment those proxies which they are entitled to vote in favor of the proposal. They will vote against any such adjournment those proxies required to be voted against the proposal. GMO will pay the costs of any additional solicitation and of any adjourned session. -14- THE GMO POOL OF THE COMMON FUND PROXY SOLICITED BY THE TRUSTEES FOR NONPROFIT ORGANIZATIONS PROXY FOR SPECIAL MEETING OF UNITHOLDERS -- June ___, 1996 The undersigned hereby appoints ___________, and each of them, proxies, with power of substitution to each, and hereby authorizes them to represent and to vote, as designated below, at the Special Meeting of Unitholders of the GMO Pool of The Common Fund for Nonprofit Organizations (the "GMO Pool"), on___, June __, 1996 at ____ a.m./p.m. Eastern time, and at any adjournments thereof, all of the units of the GMO Pool which the undersigned would be entitled to vote if personally present. NOTE: Please sign in full corporate name and indicate the signer's office. Name of Institution ___________________________________________ --------------------------------------------------------------- Name of Signer ________________________________________________ Signer's Office _______________________________________________ Date___________________________________________________________ THIS PROXY PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED UNITHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSAL. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING. THE TRUSTEES RECOMMEND A VOTE FOR THE PROPOSAL BELOW. 1. To approve a transaction involving, in essence, |_|FOR |_|AGAINST |_|ABSTAIN the reorganization of the GMO Pool as GMO Foreign Fund, a series of GMO Trust, pursuant to the Agreement and Plan of Reorganization attached as Exhibit A to the Prospectus/Proxy Statement of the GMO Pool and GMO Foreign Fund dated May __, 1996, which provides that (i) the GMO Pool will be discontinued and its assets and liabilities will be distributed pro rata to the Unitholders as a liquidating distribution, and (ii) such assets and liabilities will immediately thereafter be transferred by the Unitholders to GMO Foreign Fund in exchange for shares thereof. PLEASE SIGN ON OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE -2- APPENDIX A AGREEMENT AND PLAN OF REORGANIZATION This Agreement and Plan of Reorganization (the "Agreement") is made as of _______ __, 1996 in ______________, by and between The Common Fund for Nonprofit Organizations, a New York non-profit corporation ("The Common Fund"), on behalf of its GMO International Equities Pool (the "GMO Pool"), and GMO Trust, an open-end management investment company, on behalf of its GMO Foreign Fund series (the "Mutual Fund"). The Common Fund and GMO Trust agree as follows: 1. Plan of Reorganization. (a) The GMO Pool will, in accordance with the Constitution, By-laws and Rules of The Common Fund, be discontinued and its assets and liabilities existing on the Exchange Date (as defined in Section 6 hereof) will be distributed pro rata to the Members of The Common Fund that own units in the GMO Pool (the "Unitholders") as of the Exchange Date (the "Distribution"). It is intended that such Distribution shall be a liquidating distribution within the meaning of Section ___ of the Internal Revenue Code of 1986, as amended (the "Code"). (b) On and as of the Exchange Date, immediately following the consummation of the Distribution described in the foregoing paragraph (a), it is intended that each Unitholder shall sell, assign, convey, transfer and deliver to the Mutual Fund all of the assets and liabilities received by such Unitholder in the Distribution. In consideration therefor, the Mutual Fund shall, on and as of the Exchange Date, deliver to each Unitholder the number of full and fractional shares of beneficial interest in the Mutual Fund having a net asset value equal to the fair market value of the assets and liabilities transferred by each Unitholder to the Mutual Fund on the Exchange Date (the "Exchange"). (c) The GMO Pool will pay or cause to be paid to the Mutual Fund any interest, cash or such dividends, rights and other payments received by it on or after the Exchange Date with respect to the assets of the GMO Pool contributed to the Mutual Fund as contemplated in Section 1(b) hereof, whether accrued or contingent, received by it on or after the Exchange Date. Any such distribution shall be deemed included in the assets transferred to the Mutual Fund at the Exchange Date and shall not be separately valued unless the securities in respect of which such distribution is made shall have gone "ex" such distribution prior to the Exchange Date, in which case any such distribution which remains unpaid at the Exchange Date shall be included in the determination of the value of the assets of the GMO Pool contributed to the Mutual Fund. (d) As promptly as practicable after the Exchange Date, the GMO Pool shall to the extent not already done, be discontinued pursuant to the Constitution, By-laws and Rules of The Common Fund, and applicable law, and its legal existence terminated. 2. Representations and Warranties of the Mutual Fund. GMO Trust, on behalf of the Mutual Fund, represents and warrants to and agrees with The Common Fund, on behalf of the GMO Pool, that: (a) The Mutual Fund is a series of shares of GMO Trust, a Massachusetts business trust duly established and validly existing under the laws of The Commonwealth of Massachusetts, and has power to own all of its properties and assets and to carry out its obligations under this Agreement. GMO Trust is not required to qualify as a foreign association in any jurisdiction. Each of GMO Trust and the Mutual Fund has all necessary federal, state and local authorizations to carry on its business as now being conducted and to carry out this Agreement. (b) GMO Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and such registration has not been revoked or rescinded and is in full force and effect. (c) A statement of assets and liabilities, statements of operations, and statements of changes in net assets and schedules of investments (indicating their market values) of the Mutual Fund for the year ended February 29, 1996 have been furnished to the GMO Pool. Such statements of assets and liabilities and schedules fairly present the financial position of the Mutual Fund as of their dates and said statements of operations and changes in net assets fairly reflect the results of its operations and changes in net assets for the periods covered thereby in conformity with generally accepted accounting principles. (d) The prospectus and statement of additional information of GMO Trust, each dated February 29, 1996 (the "GMO Prospectus"), previously furnished to the GMO Pool, did not as of such date and does not contain, with respect to the GMO Trust or the Mutual Fund, any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (e) Neither the GMO Trust nor the Mutual Fund has any known liabilities of a material nature, contingent or otherwise, other than those shown as belonging to it on its statement of assets and liabilities as of February 29, 1996 and those incurred in the ordinary course of its business as an investment company since February 29, 1996. (f) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by the Mutual Fund of the transactions contemplated by this Agreement, except such as may be required under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), the 1940 Act, or state securities or blue sky laws (which term as used herein shall include the laws of the District of Columbia and of Puerto Rico). (g) The registration statement (the "Registration Statement") filed with the Securities and Exchange Commission (the "Commission") by GMO Trust on Form N-14 on behalf of the Mutual Fund and relating to the shares issuable hereunder, and the proxy statement of the GMO Pool included therein (the "Proxy Statement"), on the effective date of the Registration Statement (i) will comply in all material respects with the provisions of the 1933 Act, and the rules and regulations thereunder and (ii) will not, with respect to GMO Trust or the Mutual Fund, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and at the time of the Unitholders' meeting referred to in Section 7(a) and at the Exchange Date, the prospectus which is contained in the Registration Statement of which the Proxy Statement is a part, as amended or supplemented by any amendments or supplements filed with the Commission by the GMO Trust, -2- insofar as it does not relate to the GMO Pool, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that none of the representations and warranties in this subsection shall apply to statements in or omissions from the Registration Statement, the Proxy Statement made in reliance upon and in conformity with information furnished by the GMO Pool for use in the Registration Statement or the Proxy Statement. (h) There are no material contracts outstanding to which the Mutual Fund is a party, other than as are disclosed in the Registration Statement, the GMO Prospectus, or the Proxy Statement. (i) All of the issued and outstanding shares of beneficial interest of the Mutual Fund have been offered for sale and sold in conformity with all applicable federal securities laws. (j) The issuance of shares of the Mutual Fund pursuant to the Exchange will be in compliance with all applicable federal and state securities laws. (k) The shares of the Mutual Fund to be transferred to the Unitholders of the GMO Pool have been duly authorized and, when issued and delivered pursuant to this Agreement, will be legally and validly issued and will be fully paid and nonassessable by the Mutual Fund, and no shareholder of the Mutual Fund will have any preemptive right of subscription or purchase in respect thereof. 3. Representations and Warranties of the GMO Pool. The Common Fund, on behalf of the GMO Pool, represents and warrants to and agrees with GMO Trust, on behalf of the Mutual Funds, that: (a) The GMO Pool is an investment fund of The Common Fund, a non-profit corporation duly established and validly existing under the laws of the State of New York, and has power to carry on its business as it is now being conducted and to carry out this Agreement. Neither, The Common Fund nor the GMO Pool is required to qualify as a foreign association in any jurisdiction. Each of The Common Fund and the GMO Pool has all necessary federal, state and local authorizations to own all of its properties and assets and to carry on its business as now being conducted and to carry out this Agreement. (b) A statement of assets and liabilities, statements of operations, and statements of changes in net assets and schedules of investments (indicating their market values) of the GMO Pool for the six months ended December 31, 1995 has been furnished to the Mutual Fund. Such statements of assets and liabilities and schedules fairly present the financial position of the GMO Pool as of their dates, and said statements of operations and changes in net assets fairly reflect the results of its operations and changes in financial position for the periods covered thereby in conformity with generally accepted accounting principles. (c) The Common Fund's Information for Members dated December 31, 1995 ("The Common Fund Prospectus") which has been previously furnished to the Mutual Fund, did not contain as of its date, with respect to The Common Fund and the GMO Pool, any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. -3- (d) There are no material legal, administrative or other proceedings pending or, to the knowledge of The Common Fund or the GMO Pool, threatened against The Common Fund or the GMO Pool which assert liability or may, if successfully prosecuted to their conclusion, result in liability on the part of The Common Fund or the GMO Pool, other than as have been disclosed in The Common Fund Prospectus. (e) There are no material contracts outstanding to which the GMO Pool is a party, other than as is disclosed in the Registration Statement, The Common Fund Prospectus, or Proxy Statement. (f) Neither The Common Fund nor the GMO Pool has any known liabilities of a material nature, contingent or otherwise, other than those shown on The Common Fund's or the GMO Pool's statement of assets and liabilities as of December 31, 1995 referred to above and those incurred in the ordinary course of its business since such date. Prior to the Exchange Date, the GMO Pool will advise the Mutual Fund of all material liabilities, contingent or otherwise, incurred by it subsequent to December 31, 1995, whether or not incurred in the ordinary course of business. (g) The GMO Pool has filed or will file all federal and state tax returns which, to the knowledge of The Common Fund's officers, are required to be filed by the GMO Pool and has paid or will pay all federal and state taxes shown to be due on said returns or on any assessments received by the GMO Pool. All tax liabilities of the GMO Pool have been adequately provided for on its books, and no tax deficiency or liability of the GMO Pool has been asserted, and no question with respect thereto has been raised, by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid. (h) At the Exchange Date, The Common Fund, on behalf of the GMO Pool, will have full right, power and authority to sell, assign, transfer and deliver the assets and liabilities of the GMO Pool to be ultimately transferred to the Mutual Fund as contemplated by this Agreement. At the Exchange Date, subject only to the delivery of the assets and liabilities as contemplated by this Agreement, the Mutual Fund will acquire such assets and liabilities subject to no encumbrances, liens or security interests whatsoever and without any restrictions upon the transfer thereof arising by or through the GMO Pool. (i) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by the GMO Pool of the transactions contemplated by this Agreement, except such as may be required under the 1933 Act, the 1934 Act, the 1940 Act, or state securities or blue sky laws. (j) The Registration Statement and the Proxy Statement, on the Effective Date of the Registration Statement and insofar as they do not relate to the Mutual Fund (i) will comply in all material respects with the provisions of the 1933 Act, New York State law and The Common Fund's governing documents and the rules and regulations thereunder (except for The Common Fund Prospectus which is not subject to such laws) and (ii) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and at the time of the shareholders' meeting referred to in Section 7(a) below and on the Exchange Date will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the representations and warranties in this subsection shall -4- apply only to statements of fact relating to The Common Fund or the GMO Pool contained in the Registration Statement or the Proxy Statement, or omissions to state in any thereof a material fact relating to The Common Fund or the GMO Pool. (k) At the Exchange Date, the GMO Pool will have sold such of its assets, if any, as are necessary to assure that, after giving effect to the transfer of the assets of the GMO Pool pursuant to this Agreement, the Mutual Fund will remain a "diversified company" within the meaning of Section 5(b)(1) of the 1940 Act and in compliance with such other mandatory investment restrictions as are set forth in the GMO Prospectus. 4. Exchange Date. The net asset value of the Shares of the Mutual Fund to be delivered in exchange for assets and liabilities of the GMO Pool and the value of the assets and liabilities distributed by the GMO Pool and transferred to the Mutual Fund on the Exchange Date (the "GMO Pool Net Assets") shall in each case be determined as of the Exchange Date. (a) The net asset value of the shares of the Mutual Fund shall be computed in the manner set forth in the GMO Prospectus. The value of the assets and liabilities in the GMO Pool before this reorganization shall be determined by the Mutual Fund, in cooperation with the GMO Pool, pursuant to procedures which the Mutual Fund would use in determining the fair market value of the Mutual Fund's assets and liabilities. (b) As the transactions contemplated hereby are intended to result in a step up (or step down) in the tax basis of the GMO Pool Net Assets, no adjustment shall be made in the net asset value of either the GMO Pool or the Mutual Fund to take into account differences in realized and unrealized gains and losses. 5. Expenses, Fees, etc. All fees and expenses, including legal and accounting expenses, portfolio transfer taxes (if any) or other similar expenses incurred in connection with the consummation by the GMO Pool and the Mutual Fund of the transactions contemplated by this Agreement will be paid by Grantham, Mayo, Van Otterloo and Co. ("GMO"); provided, however, that such expenses will in any event be paid by the party directly incurring such expenses if and to the extent that the payment by the other party of such expenses would result in the disqualification of the Mutual Fund as a "regulated investment company" within the meaning of Section 851 of the Code. (a) In the event the transactions contemplated by this Agreement are not consummated by reason of the Mutual Fund's being either unwilling or unable to go forward other than by reason of the nonfulfillment or failure of any condition to the Mutual Fund's obligations referred to in Section 7(a) or Section 8, the Mutual Fund shall pay directly all reasonable fees and expenses incurred by the GMO Pool in connection with such transactions, including, without limitation, legal, accounting and filing fees. (b) In the event the transactions contemplated by this Agreement are not consummated by reason of the GMO Pool's being either unwilling or unable to go forward other than by reason of the nonfulfillment or failure of any condition to the GMO Pool's obligations referred to in Section 7(a) and Section 9, the GMO Pool shall pay directly all reasonable fees and expenses incurred by the Mutual Fund in connection with such transactions, including, without limitation, legal, accounting and filing fees. -5- (c) In the event the transactions contemplated by this Agreement are not consummated for any reason other than (i) the Mutual Fund's or the GMO Pool's being either unwilling or unable to go forward or (ii) the nonfulfillment or failure of any condition to the Mutual Fund's or the GMO Pool's obligations referred to in Section 7(a), Section 8 or Section 9 of this Agreement, then each of the Mutual Fund and the GMO Pool shall bear all of its own expenses incurred in connection with such transactions. (d) Notwithstanding any other provisions of this Agreement, if for any reason the transactions contemplated by this Agreement are not consummated, no party shall be liable to the other party for any damages resulting therefrom, including, without limitation, consequential damages, except as specifically set forth above in this Section 5. 6. Exchange Date. Delivery of the GMO Pool Net Assets and the delivery of the shares of the Mutual Fund to be issued shall be made at June 30, 1996, at ____, or at such other time and date agreed to by the Mutual Fund and the GMO Pool, the date and time upon which such delivery is to take place being referred to herein as the "Exchange Date." 7. Meeting of Shareholders; Dissolution. The Common Fund agrees to call a meeting of the GMO Pool's Unitholders as soon as is practicable after the effective date of the Registration Statement for the purpose of considering authorizing the liquidation and discontinuance of the GMO Pool, the distribution of all of its assets and liabilities to the Unitholders as contemplated herein, the subsequent transfer of the GMO Pool Net Assets to the Mutual Fund, and adopting this Agreement. (a) The GMO Pool agrees that the liquidation and discontinuance of the GMO Pool will be effected in the manner provided in the Rules of The Common Fund in accordance with applicable law and that on and after the Exchange Date, the GMO Pool shall not conduct any business except in connection with its liquidation and discontinuance. (b) GMO Trust has filed the Registration Statement with the Commission on behalf of the Mutual Fund. Each of the GMO Pool and the Mutual Fund will cooperate with the other, and each will furnish to the other the information relating to itself required by the 1933 Act and the rules and regulations thereunder to be set forth in the Registration Statement. 8. Conditions to the Parties' Obligations. The obligations of the GMO Pool and the Mutual Fund hereunder shall be subject to the satisfaction of each of the following conditions: (a) That this Agreement shall have been adopted and the transactions contemplated hereby shall have been approved by the affirmative vote of (A) two-thirds of all Members owning units in the GMO Pool and (B) of Members owning two-thirds of all the units in the GMO Pool, in each case as of the record date set for such voting by the board of trustees of The Common Fund. (b) That the GMO Pool shall have furnished to the Mutual Fund a statement of the GMO Pool's assets and liabilities, with values determined as provided in Section 4 of this Agreement all as of the Exchange Date, certified on the GMO Pool's behalf by The Common Fund's President (or any Vice President) and Treasurer, and a certificate of both such officers, dated the Exchange Date, that there has been no material adverse change in the financial position of the GMO Pool since March 31, 1996 other than changes in the assets -6- and properties since that date or changes in the market value of the assets of the GMO Pool, or changes due to dividends paid or losses from operations. (c) That the GMO Pool shall have furnished to the Mutual Fund a statement, dated the Exchange Date, signed by The Common Fund's President (or any Vice President) and Treasurer certifying that as of the Exchange Date all representations and warranties of the GMO Pool made in this Agreement are true and correct in all material respects as if made at and as of such dates and the GMO Pool has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such dates. (d) That the Mutual Fund shall have furnished to the GMO Pool a statement, dated the Exchange Date, signed by the GMO Trust's President - International (or any Vice President) and Treasurer (or any Assistant Treasurer) certifying that as of the Exchange Date all representations and warranties of the Mutual Fund made in this Agreement are true and correct in all material respects as if made at and as of such dates, and that the Mutual Fund has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to each of such dates. (e) That there shall not be any material litigation pending against either the GMO Pool or the Mutual Fund with respect to the matters contemplated by this Agreement. (f) That the Mutual Fund and the GMO Pool shall have received an opinion of Ropes & Gray, dated the Exchange Date (which opinion would be based upon certain factual representations and subject to certain qualifications), to the effect that, on the basis of the existing provisions of the Code, current administrative rules and court decisions, for federal income tax purposes. None of the Unitholders will incur any federal Income Tax liability in connection with transaction contemplated herein, provided that neither their investment in The Common Fund nor the assets received by the Unitholders in liquidation of the GMO Pool was debt-financed. (g) That the assets of the GMO Pool to be transferred to the Mutual Fund will include no assets which the Mutual Fund, by reason of charter limitations or of investment restrictions disclosed in the GMO Prospectus may not properly acquire. (h) That the Registration Statement shall have become effective under the 1933 Act, and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of The Common Fund, the GMO Pool, GMO Trust or the Mutual Fund, threatened by the Commission. (i) That the GMO Pool and the Mutual Fund shall have received from the Commission, any relevant state securities administrator, the Federal Trade Commission (the "FTC") and the Department of Justice (the "Department") such order or orders as Ropes & Gray deems reasonably necessary or desirable under the 1933 Act, the 1934 Act, the 1940 Act, any applicable state securities or blue sky laws in connection with the transactions contemplated hereby, and that all such orders shall be in full force and effect. (j) That the GMO Pool's custodian shall have delivered to the Mutual Fund a certificate identifying all of the GMO Pool Net Assets held by such custodian as of the Exchange Date. (k) That the GMO Pool's transfer agent shall have provided to the Mutual Fund (i) the originals or true copies of all of the records of the GMO Pool in the possession of such transfer agent as of the Exchange Date, (ii) a certificate setting forth the number of units of the GMO Pool -7- outstanding as of the Exchange Date, and (iii) the name and address of each holder of record of any such units and the number of units held of record by each such Unitholder. (l) That the Mutual Fund shall have received from Price Waterhouse LLP a letter addressed to the Mutual Fund dated as of the Exchange Date satisfactory in form and substance to the Mutual Fund to the effect that, on the basis of limited procedures agreed upon by the Mutual Fund and described in such letter (but not an examination in accordance with generally accepted auditing standards), as of the Exchange Date the value of the assets and liabilities of the GMO Pool to be distributed to Unitholders has been determined in accordance with the provisions of the GMO Trust's Agreement and Declaration of Trust, pursuant to the procedures customarily utilized by the Mutual Fund in valuing its assets and issuing its shares. 9. Indemnification. (a) The GMO Pool will indemnify and hold harmless, out of the assets of the GMO Pool but no other assets, the Mutual Fund and the GMO Trust (and its trustees and its officers) (for purposes of this subparagraph, the "Indemnified Parties") against any and all expenses, losses, claims, damages and liabilities (including reasonable attorneys' fees and expenses) at any time imposed upon or reasonably incurred by any one or more of the Indemnified Parties in connection with, arising out of, or resulting from any claim, action, suit or proceeding in which any one or more of the Indemnified Parties may be involved or with which any one or more of the Indemnified Parties may be threatened by reason of any untrue statement or alleged untrue statement of a material fact relating to The Common Fund or the GMO Pool contained in the Registration Statement, The Common Fund Prospectus or the Proxy Statement or any amendment or supplement to any of the foregoing, or arising out of or based upon the omission or alleged omission to state in any of the foregoing a material fact relating to The Common Fund or the GMO Pool required to be stated therein or necessary to make the statements relating to The Common Fund or the GMO Pool therein not misleading, including, without limitation, any amounts paid by any one or more of the Indemnified Parties in a reasonable compromise or settlement of any such claim, action, suit or proceeding, or threatened claim, action, suit or proceeding made with the consent of The Common Fund or the GMO Pool. The Indemnified Parties will notify The Common Fund and the GMO Pool in writing within ten days after the receipt by any one or more of the Indemnified Parties of any notice of legal process or any suit brought against or claim made against such Indemnified Party as to any matters covered by this Section 9(a). The Common Fund and the GMO Pool shall be entitled to participate at its own expense in the defense of any claim, action, suit or proceeding covered by this Section 9(a), or, if it so elects, to assume at its expense by counsel satisfactory to the Indemnified Parties the defense of any such claim, action, suit or proceeding, and if The Common Fund or the GMO Pool elects to assume such defense, the Indemnified Parties shall be entitled to participate in the defense of any such claim, action, suit or proceeding at their expense. The GMO Pool's obligation under this Section 9(a) to indemnify and hold harmless the Indemnified Parties shall constitute a guarantee of payment so that the GMO Pool will pay in the first instance any expenses, losses, claims, damages and liabilities required to be paid by it under this Section 9(a) without the necessity of the Indemnified Parties' first paying the same. (b) The Mutual Fund will indemnify and hold harmless, out of the assets of the Mutual Fund but no other assets, the GMO Pool and The Common Fund (and its trustees and its officers) (for purposes of this subparagraph, the "Indemnified Parties") against any and all expenses, losses, claims, damages and liabilities (including reasonable attorneys' fees and expenses) at any time -8- imposed upon or reasonably incurred by any one or more of the Indemnified Parties in connection with, arising out of, or resulting from any claim, action, suit or proceeding in which any one or more of the Indemnified Parties may be involved or with which any one or more of the Indemnified Parties may be threatened by reason of any untrue statement or alleged untrue statement of a material fact relating to the Mutual Fund contained in the Registration Statement or the Proxy Statement, or any amendment or supplement to any thereof, or arising out of, or based upon, the omission or alleged omission to state in any of the foregoing a material fact relating to the GMO Trust or the Mutual Fund required to be stated therein or necessary to make the statements relating to the GMO Trust or the Mutual Fund therein not misleading, including without limitation any amounts paid by any one or more of the Indemnified Parties in a reasonable compromise or settlement of any such claim, action, suit or proceeding, or threatened claim, action, suit or proceeding made with the consent of the GMO Trust or the Mutual Fund. The Indemnified Parties will notify the GMO Trust and the Mutual Fund in writing within ten days after the receipt by any one or more of the Indemnified Parties of any notice of legal process or any suit brought against or claim made against such Indemnified Party as to any matters covered by this Section 9(b). The GMO Trust and the Mutual Fund shall be entitled to participate at its own expense in the defense of any claim, action, suit or proceeding covered by this Section 9(b), or, if it so elects, to assume at its expense by counsel satisfactory to the Indemnified Parties the defense of any such claim, action, suit or proceeding, and, if the GMO Trust or the Mutual Fund elects to assume such defense, the Indemnified Parties shall be entitled to participate in the defense of any such claim, action, suit or proceeding at their own expense. The Mutual Fund's obligation under this Section 9(b) to indemnify and hold harmless the Indemnified Parties shall constitute a guarantee of payment so that the Mutual Fund will pay in the first instance any expenses, losses, claims, damages and liabilities required to be paid by it under this Section 9(b) without the necessity of the Indemnified Parties' first paying the same. 10. No Broker, etc. Each of The Common Fund and GMO Trust represents that there is no person who has dealt with it or the GMO Pool or the Mutual Fund who by reason of such dealings is entitled to any broker's or finder's or other similar fee or commission arising out of the transactions contemplated by this Agreement. 11. Termination. The Common and GMO Trust may, by mutual consent of their respective trustees, terminate this Agreement, and The Common Fund or GMO Trust, after consultation with counsel and by consent of their respective trustees or an officer authorized by such trustees, may waive any condition to their respective obligations hereunder. If the transactions contemplated by this Agreement have not been substantially completed by ________ __, 1996, this Agreement shall automatically terminate on that date unless a later date is agreed to by the GMO Pool and the Mutual Fund. 12. Covenants, etc. Deemed Material. All covenants, agreements, representations and warranties made under this Agreement and any certificates delivered pursuant to this Agreement shall be deemed to have been material and relied upon by each of the parties, notwithstanding any investigation made by them or on their behalf. 13. Sole Agreement; Amendments. This Agreement supersedes all previous correspondence and oral communications between the parties regarding the subject matter hereof, constitutes the only understanding with respect to such subject matter, may not be changed except by a letter of agreement signed by each party hereto, and shall be construed in accordance with and governed by the laws of The Commonwealth of Massachusetts. -9- 14. Agreement and Declaration of Trust. A copy of the Agreement and Declaration of Trust of GMO Trust is on file with the Secretary of State of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the trustees of GMO Trust on behalf of the GMO Foreign Fund series, as trustees and not individually and that the obligations of this instrument are not binding upon any of the trustees, officers or shareholders of GMO Trust individually but are binding only upon the assets and property of the Mutual Fund. IN WITNESS WHEREOF, this Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be deemed to be an original. GMO Trust, on behalf of its GMO Foreign Fund Series By:___________________________ President The Common Fund for Nonprofit Organizations, on behalf of its GMO International Equities Pool By:___________________________ President -10- GMO TRUST APPLICATION PART I: INVESTOR INFORMATION Please complete and return to: Domestic Phone: 617-330-7500 Grantham, Mayo, Van Otterloo & Co. Domestic Fax: 617-261-0134 40 Rowes Wharf International Phone: 617-346-7610 Boston, Massachusetts 02110 International Fax: 617-439-0457 1. ACCOUNT REGISTRATION Please provide exact name in which shares are to be owned. Unless otherwise indicated, Co-Owners will be registered as joint tenants with right of survivorship. Owner: ---------------------------------------------------------------- Co-Owner (if applicable): --------------------------------------------- Joint Tenants? Yes No ------- -------- Mailing Address: ------------------------------------------------------ Street Address (if different): ---------------------------------------- City/State/Zip: ------------------------------------------------------- Main Phone: ----------------------------------------------------------- Fax: ------------------------------------------------------------------ 2. SOCIAL SECURITY OR TAXPAYER I.D. NUMBER If the account is registered in more than one name, please indicate the name of the individual whose social security number is being provided. For gift to minor or guardianship accounts, please provide the Social Security number and name of the minor or person under guardianship. Social Security or Taxpayer I.D. Number: ------------------------------------------------- Name: ----------------------------------------------------------------- Tax Status (check one): Taxable ---- Tax-Exempt Endowment ---- Tax-Exempt Foundation ---- Tax-Exempt ERISA ---- Tax-Exempt Other (please specify) ---- --------------------------------- Withholding Status (check one): Exempt from back-up withholding. ---- Subject to back-up withholding. ---- GMO Trust Application Investor Information (continued) 3. KEY CONTACT Please list the individual to whom policy questions regarding the Account should be directed: Name Title Phone ---------------------------- ------------------------ ----------------- 4. AUTHORIZED PERSONS Please list the individuals authorized to give the Trust orders, directions, and instructions with respect to the Account's investment in the Trust. IF YOUR CUSTODIAN IS AUTHORIZED TO ACT ON BEHALF OF THE ACCOUNT, PLEASE BE SURE TO INCLUDE SIGNATURE INFORMATION AS WELL, EITHER BELOW OR AS A SEPARATE ATTACHMENT. Name Title Phone ---------------------------- ------------------------ ----------------- ---------------------------- ------------------------ ----------------- ---------------------------- ------------------------ ----------------- 5. CERTIFICATION AND SIGNATURE PLEASE READ CAREFULLY BEFORE SIGNING Under penalties of perjury, the undersigned Owner(s) certifies that (1) the social security or taxpayer identification number shown on this form is the Owner's(s') correct number and (2) the undersigned Owner(s) is not subject to back-up withholding either because the Owner(s) has not been notified by the Internal Revenue Service that the Owner(s) is subject to back-up withholding as a result of failure to report all interest or dividends, or that Internal Revenue Service has notified the undersigned Owner(s) that the Owner(s) is no longer subject to back-up withholding. If you have been notified by the Internal Revenue Service that you are currently subject to back-up withholding, strike out phrase (2) above. IF YOU ARE ONE OF THE ENTITIES LISTED BELOW, YOU ARE EXEMPT FROM BACK-UP WITHHOLDING AND SHOULD CHECK THE SPACE PROVIDED: corporation, financial institution, 501 (a) exempt organization or an IRA, HR10, U.S. or foreign government or agency, state or political subdivision, international organization, U.S. registered securities or commodities dealer, real estate investment trust, entity registered under the Investment Company Act of 1940, middleman (e.g., nominee or custodian, common trust fund, or a trust). The undersigned Owner(s) has received a copy of the Trust's prospectus and has selected the investment(s) and options indicated in Part II of this application. The undersigned Owner(s) understands the investment objectives of the Trust and that the Owner's(s') account will be administered in accordance with the terms of the prospectus. GMO Trust Application Investor Information (continued) The undersigned Owner(s) understands that in order to add to the list of authorized persons or authorized accounts set forth in sections (4) and (5) of Part II of this application or to change either list, the Owner(s) must submit a written request. SIGN EXACTLY AS NAME(S) OF REGISTERED OWNER(S) APPEARS ABOVE IN PART I. (Include legal title if signing for corporation, trust, custodian account, etc.) Signed: -------------------- ------------------------ ------------- Owner Title Date Signed: -------------------- ------------------------ ------------- Co-Owner Title Date GMO TRUST APPLICATION PART II: GMO FOREIGN FUND SPECIAL ACCOUNT APPLICATION Please complete and return to: Domestic Phone: 617-330-7500 Grantham, Mayo, Van Otterloo & Co. Domestic Fax: 617-261-0134 40 Rowes Wharf International Phone: 617 346-7610 Boston, Massachusetts 02110 International Fax: 617-439-0457 Owner(s): 1. FUNDS TO BE INCLUDED Please INITIAL Fund(s) which are to be included in your account. Only those Funds for which you give express permission (by initialing after the Fund name) will be used for your account.
U.S. Equities International Equities Fixed Income US Core International Core Emerging Country Debt -------- -------- -------- Growth Allocation Curr Hedged Intl Core International Bond -------- -------- -------- Value Allocation Intl Small Companies Curr Hedged Intl Bond -------- -------- -------- Fundamental Value Emerging Markets Domestic Bond -------- -------- -------- Core II Secondaries Japan Short-Term Income -------- -------- -------- US Sector Allocation Foreign X Global Bond -------- -------- -------- Tobacco-Free Core -------- Global Hedged Equity --------
2. INITIAL INVESTMENT The undersigned Owner, being a unitholder of the GMO International Equities Pool of The Common Fund for Nonprofit Organizations ("The Common Fund"), acknowledges receipt of a copy of the Agreement and Plan of Reorganization dated _________, 1996 (the "Plan") by and between The Common Fund and the Trust, and agrees, pursuant to and in accordance with the terms of the Plan, (i) to accept from the GMO Pool a pro rata share of the GMO Pool's assets and liabilities as a liquidating distribution upon the discontinuance of the GMO Pool in accordance with the Plan, and (ii) to immediately thereafter transfer all such assets and liabilities to GMO Foreign Fund as its initial investment in GMO Foreign Fund, in exchange for shares of GMO Foreign Fund representing a pro rata share of the assets and liabilities contributed by all unitholders to the Fund pursuant to the Plan. The undersigned Owner hereby appoints [Investors Bank & Trust Company, the Trust's custodian,] as its true and lawful attorney-in-fact, with full power to accept delivery and effect the transfer of the assets and liabilities of the GMO Pool, to execute such documents or certificates as may be necessary to effect such delivery or transfer, and generally to do all such things in such Owner's name and behalf to enable the Plan to be carried out in accordance with its terms, hereby ratifying and confirming all such actions as may be taken in such Owner's behalf in carrying out the Plan. For additional investments, funds should be wired to: Investors Bank & Trust Please call prior to wiring to confirm Boston, Massachusetts date and amount of wire. ABA# 011001438 Attn: Transfer Agent GMO Deposit Account # 55555-4444 Further Credit: GMO Fund Name, Shareholder Name GMO Trust Application GMO Fund Account Application 3. DISTRIBUTIONS All distributions will be reinvested if no item is checked. Please note below special distribution instructions for individual funds (e.g., For all funds, reinvest dividends and capital gains except for U.S. Core Fund, whose dividends should be paid in cash). Dividends: Reinvested ----- Paid in Cash ----- Capital Gains: Reinvested ----- Paid in Cash ----- Special instructions: ------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- 4. WIRE INSTRUCTIONS Please list full wire instructions for the transfer of redemption proceeds and distributions: Bank: ----------------------------------------------- Location: ------------------------------------------- ABA #: ---------------------------------------------- Attention: ------------------------------------------ Account #: ------------------------------------------ Further Credit: ------------------------------------- 5. TRANSACTION CONFIRMATIONS A transaction confirmation (typically mailed by the Fund's custodian on the day following the activity) is sent to the Registration Address noted in Block 1 of Part I. Please indicate to whom this confirmation should be addressed. Attn.: ---------------------------------- If you would like an additional confirmation sent, please indicate the individual who should receive the confirmation below. Name: Phone: -------------------------------------- ------------------- Title: Fax: ------------------------------------- --------------------- Address: ----------------------------------- ----------------------------------- ----------------------------------- GMO Trust Application GMO Fund Account Application 6. MONTHLY STATEMENTS AND QUARTERLY QUANTITATIVE COMMENTARIES Please list the individuals who should receive monthly statements of shares held and Fund performance and/or quarterly GMO market and Fund commentaries (attach additional pages if necessary): Name: Phone: ----------------------------------- ----------------------- Title: Fax: ---------------------------------- ------------------------- Address: -------------------------------- Send Monthly Statements? -------------------------------- ----- -------------------------------- Send Quant Commentaries? ----- Name: Phone: ----------------------------------- ----------------------- Title: Fax: ---------------------------------- ------------------------- Address: -------------------------------- Send Monthly Statements? -------------------------------- ----- -------------------------------- Send Quant Commentaries? ----- Name: Phone: ----------------------------------- ----------------------- Title: Fax: ---------------------------------- ------------------------- Address: -------------------------------- Send Monthly Statements? -------------------------------- ----- -------------------------------- Send Quant Commentaries? ----- Name: Phone: ----------------------------------- ----------------------- Title: Fax: ---------------------------------- ------------------------- Address: -------------------------------- Send Monthly Statements? -------------------------------- ----- -------------------------------- Send Quant Commentaries? ----- Name: Phone: ----------------------------------- ----------------------- Title: Fax: ---------------------------------- ------------------------- Address: -------------------------------- Send Monthly Statements? -------------------------------- ----- -------------------------------- Send Quant Commentaries? ----- 7. AUTHORIZED SIGNATURE Please sign exactly as name of registered individual appears in (1) of Part I. Include legal title if signing for a corporation, trust, custodian account, etc. --------------------------------- ----------------------- ------------- Authorized Signature Title Date GMO TRUST PART B. STATEMENT OF ADDITIONAL INFORMATION MAY __, 1996 This Statement of Additional Information contains material which may be of interest to investors but which is not included in the Prospectus/Proxy Statement (the "Prospectus") of GMO Trust's GMO Foreign Fund and The Common Fund for Nonprofit Organization's GMO International Equities Pool dated May __, 1996. The Statement of Additional Information of GMO Trust (the "Trust") dated February 29, 1996, has been filed with the Securities and Exchange Commission and is incorporated herein by reference (File No. 2-98772). This Statement of Additional Information is not a prospectus and is authorized for distribution only when it accompanies or follows delivery of a prospectus, and should be read in conjunction with the Prospectus. Investors may obtain a free copy of the Prospectus or the Statement of Additional Information by writing the Trust, 40 Rowes Wharf, Boston, MA 02110 or by calling 1-800-XXX-XXXX. -1- FINANCIAL STATEMENTS The financial statements and schedules of GMO Foreign Fund have been previously filed electronically with the Securities and Exchange Commission and are incorporated herein by reference to the registrant's registration statement on Form N-1A (File No. 2-98772). The financial statements and schedules of the GMO International Equities Pool of The Common Fund for Nonprofit Organizations are provided below (financial statements to be filed by amendment). -2- GMO TRUST PART C. OTHER INFORMATION ITEM 15. INDEMNIFICATION See Item 27 of Pre-Effective Amendment No. 1 which is hereby incorporated by reference to the registrant's registration statement on Form N-1A (File No. 2-98772). Item 16. EXHIBITS 1. Agreement and Declaration of Trust of the GMO Trust (the "Trust")1; Amendment No. 1 to the Agreement and Declaration of Trust1; Amendment No. 2 to the Agreement and Declaration of Trust1; Amendment No. 3 to the Agreement and Declaration of Trust1; Amendment No. 4 to the Agreement and Declaration of Trust1; Amendment No. 5 to the Agreement and Declaration of Trust1; Amendment No. 6 to the Agreement and Declaration of Trust1; Amendment No. 7 to the Agreement and Declaration of Trust1; Amendment No. 8 to the Agreement and Declaration of Trust1; Amendment No. 9 to the Agreement and Declaration of Trust1; Amendment No. 10 to the Agreement and Declaration of Trust1; Amendment No. 11 to the Agreement and Declaration of Trust1; Amendment No. 12 to the Agreement and Declaration of Trust1; Amendment No. 13 to the Agreement and Declaration of Trust1; Amendment No. 14 to the Agreement and Declaration of Trust1; Amendment No. 15 to the Agreement and Declaration of Trust1; Amendment No. 16 to the Agreement and Declaration of Trust1; Amendment No. 17 to the Agreement and Declaration of Trust1; Amendment No. 18 to the Agreement and Declaration of Trust1; Amendment No. 19 to the Agreement and Declaration of Trust1; Form of Amendment No. 20 to the Agreement and Declaration of Trust1; Amendment No. 21 to the Agreement and Declaration of Trust1; Amendment No. 22 to the Agreement and Declaration of Trust1; Amendment No. 23 to the Agreement and Declaration of Trust2; Amendment No. 24 to the Agreement and Declaration of Trust2; Amendment No. 25 to the Agreement and Declaration of Trust2; and Form of Amendment No. 26 to the Agreement and Declaration of Trust2. ------------------------------------ 1 Previously manually filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). 2 Previously electronically filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). -1- 2. By-laws of the Trust2. 3. None. 4. Agreement and Plan of Reorganization - constitutes Appendix A included in Part A hereof. 5. Not Applicable. 6. (a) Form of Management Contract between the Trust, on behalf of its GMO Core Fund (formerly Domestic Equity Series), and Grantham, Mayo, Van Otterloo & Co. ("GMO")1; (b) Form of Management Contract between the Trust, on behalf of its GMO Currency Hedged International Bond Fund (formerly Domestic Equity (South Africa Free) Series), and GMO1; (c) Form of Management Contract between the Trust, on behalf of its GMO International Core Fund (formerly International Series), and GMO1; (d) Form of Management Contract between the Trust, on behalf of its GMO Growth Allocation Fund (formerly Domestic Equity Growth Series), and GMO1; (e) Form of Management Contract between the Trust, on behalf of its Pelican Fund, and GMO1; (f) Form of Management Contract between the Trust, on behalf of its GMO Value Allocation Fund (formerly Blue Chip Series), and GMO1; (g) Form of Management Contract between the Trust, on behalf of its GMO International Small Companies Fund (formerly International Small Capitalization Series), and GMO1; (h) Form of Management Contract between the Trust, on behalf of its GMO Japan Fund (formerly Japan Series), and GMO1; ------------------------------------ 1 Previously manually filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). 2 Previously electronically filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). -2- (i) Form of Management Contract between the Trust, on behalf of its GMO Short-Term Income Fund (formerly Money Market Series), and GMO1; (j) Form of Management Contract between the Trust, on behalf of its GMO Core II Secondaries Fund (formerly GMO Second Tier Fund), and GMO1; (k) Form of Management Contract between the Trust, on behalf of its GMO Fundamental Value Fund, and GMO1; (l) Form of Management Contract between the Trust, on behalf of its GMO Tobacco-Free Core Fund, and GMO1; (m) Form of Management Contract between the Trust, on behalf of its GMO U.S. Sector Allocation Fund, and GMO1; (n) Management Contract between the Trust, on behalf of its GMO Conservative Equity Fund, and GMO1; (o) Management Contract between the Trust, on behalf of its GMO International Bond Fund (formerly GMO World Bond Fund), and GMO1; (p) Management Contract between the Trust, on behalf of its GMO Emerging Country Debt Fund (formerly GMO International SAF Fund), and GMO1; (q) Management Contract between the Trust, on behalf of its GMO Emerging Markets Fund, and GMO1; (r) Sub-Advisory Contract between GMO, on behalf of its GMO Emerging Markets Fund, and Dancing Elephant, Ltd.1; (s) Form of Management Contract between the Trust, on behalf of its GMO Domestic Bond Fund (formerly GMO Domestic T & A Fund), and GMO1; (t) Form of Management Contract between the Trust, on behalf of its GMO Global Hedged Equity Fund (formerly GMO Global T & A Fund), and GMO1; ------------------------------------ 1 Previously manually filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). 2 Previously electronically filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). -3- (u) Form of Management Contract between the Trust, on behalf of its GMO Currency Hedged International Core Fund (formerly GMO Domestic Long Bond Fund), and GMO1; (v) Form of Management Contract between the Trust, on behalf of its GMO Core Emerging Country Debt Fund (formerly GMO Bond Allocation Fund), and GMO1; (w) Form of Management Contract between the Trust, on behalf of the GMO REIT Fund, and GMO2; (x) Form of Management Contract between the Trust, on behalf of the GMO Global Bond Fund, and GMO2; (y) Form of Management Contract between the Trust, on behalf of the GMO Foreign Fund (formerly GMO Global Core Fund), and GMO2 (z) Form of Management Contract between the Trust, on behalf of the GMO International Equity Allocation Fund, and GMO2. (aa) Form of Management Contract between the Trust, on behalf of the GMO Traditional International Equity Allocation Fund, and GMO2. (bb) Form of Management Contract between the Trust, on behalf of the GMO World Equity Allocation Fund, and GMO2. (cc) Form of Management Contract between the Trust, on behalf of the GMO Traditional World Equity Allocation Fund, and GMO2. (dd) Form of Management Contract between the Trust, on behalf of the GMO Global Equity Allocation Fund, and GMO2. (ee) Form of Management Contract between the Trust, on behalf of the GMO Traditional Global Equity Allocation Fund, and GMO2. (ff) Form of Management Contract between the Trust, on behalf of the GMO Global Balanced Allocation Fund, and GMO2. ------------------------------------ 1 Previously manually filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). 2 Previously electronically filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). -4- (gg) Form of Management Contract between the Trust, on behalf of the GMO Traditional Global Balanced Allocation Fund, and GMO2. 7. None. 8. None. 9. (a) Custodian Agreement among the Trust, on behalf of its GMO Core Fund, GMO Currency Hedged International Bond Fund (formerly GMO SAF Core Fund), GMO Value Allocation Fund, GMO Growth Allocation Fund (formerly GMO Growth Fund), and GMO Short-Term Income Fund, GMO and Investors Bank & Trust Company ("IBT")1; (b) Form of Letter Agreement among the Trust, on behalf of its GMO Tobacco- Free Core Fund and GMO Fundamental Value Fund, GMO and IBT1; (c) Form of Letter Agreement among the Trust, on behalf of its GMO U.S. Sector Allocation Fund, GMO and IBT1; (d) Letter Agreement among the Trust, on behalf of its GMO Conservative Equity Fund, GMO and IBT1; (e) Letter Agreement among the Trust, on behalf of its GMO International Bond Fund (formerly GMO World Bond Fund), GMO and IBT1; (f) Form of Letter Agreement among the Trust, on behalf of its GMO Core II Secondaries Fund, GMO and IBT1; (g) Form of Custodian Agreement among the Trust, on behalf of its GMO International Core Fund and GMO Japan Fund, GMO and Brown Brothers Harriman & Co. ("BBH")1; (h) Form of Letter Agreement among the Trust, on behalf of its GMO Emerging Markets Fund, GMO and BBH1; (i) Letter Agreement among the Trust, on behalf of its GMO Emerging Country Debt Fund, GMO and IBT1; ------------------------------------ 1 Previously manually filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). 2 Previously electronically filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). -5- (j) Form of Letter Agreement among the Trust, on behalf of its GMO Core Emerging Country Debt Fund, GMO and IBT1; (k) Custodian Agreement among the Trust, on behalf of its Pelican Fund, GMO and State Street Bank and Trust Company1; (l) Form of Letter Agreement among the Trust, on behalf of its GMO Domestic Bond Fund (formerly GMO Domestic T & A Fund), GMO and IBT1; (m) Form of Letter Agreement among the Trust, on behalf of its GMO Global Hedged Equity Fund (formerly GMO Global T & A Fund), GMO and BBH1; (n) Form of Letter Agreement among the Trust, on behalf of its GMO International Small Companies Fund, GMO and BBH1; (o) Form of Letter Agreement among the Trust, on behalf of its GMO Currency Hedged International Core Fund, GMO and IBT1; (p) Form of Letter Agreement among the Trust, on behalf of its GMO REIT Fund and GMO Global Bond Fund, GMO and IBT2; (q) Form of Letter Agreement among the Trust, on behalf of its GMO Foreign Fund (formerly GMO Global Core Fund), GMO and BBH2; (r) Form of Letter Agreement among the Trust, on behalf of its GMO International Equity Allocation Fund, GMO Traditional International Equity Allocation Fund, GMO World Equity Allocation Fund, GMO Traditional World Equity Allocation Fund, GMO Global Equity Allocation Fund, GMO Traditional Global Equity Allocation Fund, GMO Global Balanced Allocation Fund, GMO Traditional Global Balanced Allocation Fund, GMO and IBT2. 10. None. ------------------------------------ 1 Previously manually filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). 2 Previously electronically filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). -6- 11. Opinion and consent of Ropes & Gray with respect to the GMO Foreign Fund (to be filed by amendment). ------------------------------------ 1 Previously manually filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). 2 Previously electronically filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). -7- 12. Opinion of Ropes & Gray supporting the tax matters and consequences to shareholders discussed in the prospectus (to be filed by amendment). 13. (a) Transfer Agency Agreement among the Trust, on behalf of its GMO Core Fund, GMO Currency Hedged International Bond Fund (formerly GMO SAF Core Fund), GMO Growth Allocation Fund (formerly GMO Growth Fund), GMO Value Allocation Fund, GMO Short-Term Income Fund, GMO International Core Fund and GMO Japan Fund, GMO and IBT1; (b) Form of Letter Agreement among the Trust, on behalf of its GMO Fundamental Value Fund, and GMO Tobacco-Free Core Fund (formerly GMO Global Bond Fund), GMO and IBT1; (c) Form of Letter Agreement among the Trust, on behalf of its GMO U.S. Sector Allocation Fund, GMO and IBT1; (d) Letter Agreement among the Trust, on behalf of its GMO Conservative Equity Fund and GMO International Bond Fund (formerly GMO World Bond Fund), GMO and IBT1; (e) Letter Agreement among the Trust, on behalf of its GMO Emerging Markets Fund, GMO and IBT1; (f) Letter Agreement among the Trust, on behalf of its GMO Emerging Country Debt Fund, GMO and IBT1; (g) Form of Transfer Agency Agreement among the Trust, on behalf of its GMO Domestic Bond Fund (formerly GMO Domestic Hedged Equity Fund), GMO Global Hedged Equity Fund, GMO and IBT1 ; (h) Form of Transfer Agency Agreement among the Trust, on behalf of its GMO Core II Secondaries Fund, GMO and IBT1; (i) Form of Transfer Agency Agreement among the Trust, on behalf of its GMO International Small Companies Fund, GMO and IBT1; (j) Form of Transfer Agency Agreement among the Trust, on behalf of its Pelican Fund, GMO and IBT1; (k) Form of Transfer Agency Agreement among the Trust, on behalf of its GMO Currency Hedged International Core Fund, GMO and IBT1; ------------------------------------ 1 Previously manually filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). 2 Previously electronically filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). -8- (l) Form of Transfer Agency Agreement among the Trust, on behalf of its GMO Core Emerging Country Debt Fund, GMO and IBT1; (m) Form of Transfer Agency Agreement among the Trust, on behalf of its GMO REIT Fund, GMO Global Core Fund and GMO Global Bond Fund, GMO and IBT2; (n) Form of Transfer Agency Agreement among the Trust, on behalf of its GMO Foreign Fund, GMO and IBT2; (o) Form of Transfer Agency Agreement among the Trust, on behalf of its GMO International Equity Allocation Fund, GMO Traditional International Equity Allocation Fund, GMO World Equity Allocation Fund, GMO Traditional World Equity Allocation Fund, GMO Global Equity Allocation Fund, GMO Traditional Global Equity Allocation Fund, GMO Global Balanced Allocation Fund, GMO Traditional Global Balanced Allocation Fund, GMO and IBT2. (p) Form of Notification of Fee Waiver and Expense Limitation by GMO to the Trust relating to all Funds of the Trust2. 14. Consent of Price Waterhouse LLP2 (to be filed by Amendment). 15. Not Applicable. 16. Manually signed copies of any power of attorney2. ------------------------------------ 1 Previously manually filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). 2 Previously electronically filed with the Securities and Exchange Commission and incorporated herein by reference to the Registrant's registration statement on Form N-1A (File No. 2-98772). -9- ITEM 17. UNDERTAKINGS (a) The undersigned Registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this Registration Statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) under the Securities Act of 1933, the reoffering prospectus will contain the information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (b) The undersigned Registrant agrees that every prospectus that is filed under paragraph (a) above will be filed as a part of an amendment to this Registration Statement and will not be used until the amendment is effective, and that, in determining any liability under the Act, each post-effective amendment shall be deemed to be a new Registration Statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them. -10- SIGNATURES As required by the Securities Act of 1933, this registration statement has been signed on behalf of the registrant, in the City of Boston and The Commonwealth of Massachusetts, on the 9th day of April, 1996. GMO Trust By: R. JEREMY GRANTHAM* _____________________ R. Jeremy Grantham President - Domestic Quantitative; Principal Executive Officer; Trustee As required by the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated.
Signatures Title Date - ---------- ----- ---- R. JEREMY GRANTHAM* President - Domestic Quantitative; April 9, 1996 - ------------------- R. Jeremy Grantham Principal Executive Officer; Trustee KINGSLEY DURANT* Treasurer; Principal Financial and April 9, 1996 - ---------------- Kingsley Durant Accounting Officer HARVEY R. MARGOLIS* Trustee April 9, 1996 - ------------------- Harvey R. Margolis EYK H.A. VAN OTTERLOO* President - International; Trustee April 9, 1996 - --------------------- Eyk H.A. Van Otterloo
* By: /s/ WILLIAM R. ROYER ____________________ William R. Royer Attorney-in-Fact -11- GMO TRUST GMO TRUST (the "Trust"), 40 Rowes Wharf, Boston, Massachusetts 02110, is an open-end management investment company offering seven diversified portfolios and fifteen non-diversified portfolios (the portfolios, other than the Pelican Fund whose shares are offered pursuant to a separate prospectus, are referred to herein as the "Funds"). Each Fund has its own investment objectives and strategies. Grantham, Mayo, Van Otterloo & Co. (the "Manager") is the manager of each Fund. The Manager has entered into a Consulting Agreement with Dancing Elephant, Ltd. (the "Consultant") with respect to the management of the Emerging Markets Fund. Unless otherwise noted, each of the Funds referred to below is a diversified portfolio. For a discussion of the significance and/or risks associated with "non-diversified" portfolios, see "Descriptions and Risks of Fund Investment Practices -- Diversified and Non-Diversified Portfolios." A Table of Contents appears on page 3 of this Prospectus. - -------------------------------------------------------------------------------- DOMESTIC EQUITY FUNDS The Trust offers the following seven domestic equity portfolios which are collectively referred to as the "Domestic Equity Funds." GMO CORE FUND (the "Core Fund") seeks a total return greater than that of the Standard & Poor's 500 Stock Index (the "S&P 500") through investment in common stocks chosen from among the 1,200 companies with the largest equity capitalization whose securities are listed on a United States national securities exchange (the "Large Cap 1200"). GMO TOBACCO-FREE CORE FUND (the "Tobacco-Free Core Fund") seeks a total return greater than that of the S&P 500 through investment in common stocks chosen from the Large Cap 1200 which are not Tobacco Producing Issuers. A "Tobacco Producing Issuer" is an issuer which derives more than 10% of its gross revenues from the production of tobacco-related products. GMO VALUE ALLOCATION FUND (the "Value Allocation Fund") is a non-diversified portfolio that seeks a total return greater than that of the S&P 500 through investment in common stocks chosen from the Large Cap 1200. Strong consideration is given to common stocks whose current prices, in the opinion of the Manager, do not adequately reflect the on-going business value of the underlying company. GMO GROWTH ALLOCATION FUND (the "Growth Allocation Fund") is a non-diversified portfolio that seeks long-term growth of capital through investment in the equity securities of companies chosen from the Large Cap 1200. Current income is only an incidental consideration. GMO U.S. SECTOR ALLOCATION FUND (the "U.S. Sector Allocation Fund") is a non-diversified portfolio that seeks a total return greater than that of the S&P 500 through investment in common stocks chosen from among the 1,800 companies with the largest equity capitalization whose securities are listed on a United States national securities exchange. GMO CORE II SECONDARIES FUND (the "Core II Secondaries Fund") seeks long-term growth of capital through investment primarily in companies whose equity capitalization ranks in the lower two-thirds of the 1800 companies with the largest equity capitalization whose securities are listed on a United States national securities exchange. Current income is only an incidental consideration. GMO FUNDAMENTAL VALUE FUND (the "Fundamental Value Fund") seeks long-term capital growth through investment primarily in equity securities. Consideration of current income is secondary to this principal objective. INTERNATIONAL EQUITY FUNDS The Trust offers the following seven international equity portfolios which are collectively referred to as the "International Equity Funds." GMO INTERNATIONAL CORE FUND (the "International Core Fund") seeks maximum total return through investment in a portfolio of common stocks of non-U.S. issuers. - -------------------------------------------------------------------------------- This Prospectus concisely describes the information which investors ought to know before investing. Please read this Prospectus carefully and keep it for further reference. A Statement of Additional Information dated February 29, 1996, as revised from time to time, is available free of charge by writing to Grantham, Mayo, Van Otterloo & Co., 40 Rowes Wharf, Boston, Massachusetts 02110 or by calling (617) 330-7500. The Statement, which contains more detailed information about each Fund, has been filed with the Securities and Exchange Commission ("SEC") and is incorporated by reference in this Prospectus. THE EMERGING COUNTRY DEBT AND THE CORE EMERGING COUNTRY DEBT FUNDS MAY INVEST WITHOUT LIMIT, THE INTERNATIONAL BOND AND CURRENCY HEDGED INTERNATIONAL BOND FUNDS MAY INVEST UP TO 25% OF THEIR NET ASSETS AND THE DOMESTIC BOND AND FOREIGN FUNDS MAY INVEST UP TO 5% OF THEIR NET ASSETS IN LOWER-RATED BONDS, COMMONLY KNOWN AS "JUNK BONDS." INVESTMENTS OF THIS TYPE ARE SUBJECT TO A GREATER RISK OF LOSS OF PRINCIPAL AND NON-PAYMENT OF INTEREST. INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THESE FUNDS. PLEASE SEE "DESCRIPTION AND RISKS OF FUND INVESTMENT PRACTICES -- LOWER RATED SECURITIES." THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTUS FEBRUARY 29, 1996 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (the "Currency Hedged International Core Fund") is a non-diversified portfolio that seeks maximum total return through investment in a portfolio of common stocks of non-U.S. issuers and through management of the Fund's foreign currency positions. The Fund has similar policies to the International Core Fund, except that the Currency Hedged International Core Fund will maintain currency hedges with respect to a substantial portion of the foreign currency exposure represented in the Fund's benchmark while the International Core Fund will generally hedge only a limited portion of the currency exposure of that benchmark. GMO FOREIGN FUND (the "Foreign Fund") is a non-diversified portfolio that seeks maximum total return through investment in a portfolio of equity securities of non-U.S. issuers. GMO INTERNATIONAL SMALL COMPANIES FUND (the "International Small Companies Fund") seeks maximum total return through investment primarily in equity securities of foreign issuers whose equity securities are traded on a major stock exchange of a foreign country ("foreign stock exchange companies") and whose equity capitalization at the time of investment, when aggregated with the equity capitalizations of all foreign stock exchange companies in that country whose equity capitalizations are smaller than that of such company, is less than 50% of the aggregate equity capitalization of all foreign stock exchange companies in such country. GMO JAPAN FUND (the "Japan Fund") is a non-diversified portfolio that seeks maximum total return through investment in Japanese securities, primarily in common stocks of Japanese companies. GMO EMERGING MARKETS FUND (the "Emerging Markets Fund") is a non-diversified portfolio that seeks long term capital appreciation consistent with what the Manager believes to be a prudent level of risk through investment in equity and equity-related securities traded in the securities markets of newly industrializing countries in Asia, Latin America, the Middle East, Southern Europe, Eastern Europe and Africa. GMO GLOBAL HEDGED EQUITY FUND (the "Global Hedged Equity Fund") is a non-diversified portfolio that seeks total return consistent with minimal exposure to general equity market risk. FIXED INCOME FUNDS The Trust offers the following six domestic and international fixed income portfolios which are collectively referred to as the "Fixed Income Funds." GMO DOMESTIC BOND FUND (the "Domestic Bond Fund") is a non-diversified portfolio that seeks high total return through investment primarily in U.S. Government Securities. The Fund may also invest a significant portion of its assets in other investment grade bonds (including convertible bonds) denominated in U.S. dollars. The Fund's portfolio will generally have a duration of approximately four to six years (excluding short-term investments). GMO SHORT-TERM INCOME FUND (the "Short-Term Income Fund") is a non-diversified portfolio that seeks current income to the extent consistent with the preservation of capital and liquidity through investment in a portfolio of high quality short-term instruments. The Short-Term Income Fund intends to invest in short-term securities, but it is not a "money market fund." GMO INTERNATIONAL BOND FUND (the "International Bond Fund") is a non-diversified portfolio that seeks high total return by investing primarily in investment grade bonds (including convertible bonds) denominated in various currencies including U.S. dollars or in multicurrency units. The Fund seeks to provide a total return greater than that provided by the international fixed income securities market generally. GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (the "Currency Hedged International Bond Fund") is a non-diversified portfolio with the same investment objectives and policies as the International Bond Fund except that the Currency Hedged International Bond Fund will generally attempt to hedge substantially all of its foreign currency risk while the International Bond Fund will generally not hedge any of its foreign currency risk. Despite the otherwise identical objectives and policies, the composition of the two portfolios may differ substantially at any given time. GMO GLOBAL BOND FUND (the "Global Bond Fund") is a non-diversified portfolio that seeks high total return by investing primarily in investment grade bonds (including convertible bonds) denominated in various currencies including U.S. dollars or in multicurrency units. The Fund seeks to provide a total return greater than that provided by the global fixed income securities market generally. GMO EMERGING COUNTRY DEBT FUND (the "Emerging Country Debt Fund") is a non-diversified portfolio that seeks high total return by investing primarily in sovereign debt (bonds and loans) of countries in Asia, Latin America, the Middle East, Southern Europe, Eastern Europe and Africa. GMO CORE EMERGING COUNTRY DEBT FUND (the "Core Emerging Country Debt Fund") is a non-diversified portfolio that seeks high total return by investing primarily in the most marketable sovereign debt (bonds and loans) of countries in Asia, Latin America, the Middle East, Southern Europe, Eastern Europe and Africa. The Core Emerging Country Debt Fund has not yet commenced operations. - -------------------------------------------------------------------------------- Shares of each Fund are sold to investors by the Trust. The minimum initial investment in the Trust (which minimum investment may be allocated among one or more Funds) is $10,000,000 and the minimum for each subsequent investment is $250,000. For more information, see "Purchase of Shares." For information concerning share redemption procedures, see "Redemption of Shares." Investors should consider the risks associated with an investment in the Funds. For information concerning the types of investment practices in which a particular Fund may engage, see "Investment Objectives and Policies". For more information concerning such investment practices and their associated risks, see "Descriptions and Risks of Fund Investment Practices." TABLE OF CONTENTS SCHEDULE OF FEES AND EXPENSES................................................. 4 FINANCIAL HIGHLIGHTS.......................................................... 6 INVESTMENT OBJECTIVES AND POLICIES............................................15 DOMESTIC EQUITY FUNDS.....................................................15 Core Fund.............................................................15 Tobacco-Free Core Fund................................................15 Value Allocation Fund.................................................16 Growth Allocation Fund................................................16 U.S. Sector Allocation Fund...........................................17 Core II Secondaries Fund..............................................17 Fundamental Value Fund................................................18 INTERNATIONAL EQUITY FUNDS................................................19 International Core Fund...............................................19 Currency Hedged International Core Fund...............................19 Foreign Fund..........................................................20 International Small Companies Fund ...................................21 Japan Fund............................................................21 Emerging Markets Fund.................................................22 Global Hedged Equity Fund.............................................23 FIXED INCOME FUNDS........................................................26 Domestic Bond Fund....................................................26 Short-Term Income Fund................................................26 International Bond Fund...............................................27 Currency Hedged International Bond Fund...............................28 Global Bond Fund......................................................28 Emerging Country Debt Fund............................................29 Core Emerging Country Debt Fund.......................................30 DESCRIPTIONS AND RISKS OF FUND INVESTMENT PRACTICES......................................................30 Portfolio Turnover........................................................30 Diversified and Non-Diversified Portfolios................................31 Certain Risks of Foreign Investments......................................31 General...............................................................31 Emerging Markets......................................................31 Securities Lending........................................................31 Depository Receipts...................................................32 Convertible Securities....................................................32 Futures and Options.......................................................32 Options...............................................................32 Writing Covered Options...............................................32 Futures...............................................................33 Index Futures.........................................................34 Interest Rate Futures.................................................34 Options on Futures Contracts..........................................34 Uses of Options, Futures and Options on Futures...........................34 Risk Management.......................................................34 Hedging...............................................................35 Investment Purposes...................................................35 Synthetic Sales and Purchases.........................................35 Swap Contracts and Other Two-Party Contracts..............................36 Swap Contracts........................................................36 Interest Rate and Currency Swap Contracts.............................36 Equity Swap Contracts and Contracts for Differences......................................................36 Interest Rate Caps, Floors and Collars................................37 Foreign Currency Transactions ............................................37 Repurchase Agreements.....................................................38 Debt and Other Fixed Income Securities Generally..........................38 Temporary High Quality Cash Items.........................................38 U.S. Government Securities and Foreign Government Securities...................................................38 Mortgage-Backed and Other Asset-Backed Securities..............................................................39 Collateralized Mortgage Obligations ("CMOs"); Strips and Residuals......................................39 Adjustable Rate Securities................................................39 Lower Rated Securities....................................................40 Brady Bonds...............................................................40 Zero Coupon Securities....................................................40 Indexed Securities........................................................40 Firm Commitments..........................................................41 Loans, Loan Participations and Assignments................................41 Reverse Repurchase Agreements and Dollar Roll Agreements.........................................................41 Illiquid Securities.......................................................42 PURCHASE OF SHARES............................................................42 Purchase Procedures.......................................................43 REDEMPTION OF SHARES..........................................................43 DETERMINATION OF NET ASSET VALUE..............................................44 DISTRIBUTIONS.................................................................44 TAXES.........................................................................45 Withholding on Distributions to Foreign Investors.........................45 Foreign Tax Credits.......................................................45 Loss of Regulated Investment Company Status...............................45 MANAGEMENT OF THE TRUST.......................................................46 ORGANIZATION AND CAPITALIZATION OF THE TRUST..............................................................47 Appendix A....................................................................48 RISKS AND LIMITATIONS OF OPTIONS, FUTURES AND SWAPS.................................................................48 Limitations on the Use of Options and Futures Portfolio Strategies..................................................48 Risk Factors in Options Transactions......................................48 Risk Factors in Futures Transactions......................................48 Risk Factors in Swap Contracts, OTC Options and other Two-Party Contracts.............................................49 Additional Regulatory Limitations on the Use of Futures and Related Options, Interest Rate Floors, Caps and Collars and Interest Rate and Currency Swap Contracts...............................................49 Appendix B....................................................................50 COMMERCIAL PAPER AND CORPORATE DEBT RATINGS...................................................................50 Commercial Paper Ratings .................................................50 Corporate Debt Ratings....................................................50 Standard & Poor's Corporation.............................................50 Moody's Investors Service, Inc............................................50 SCHEDULE OF FEES AND EXPENSES
GMO FUND NAME SHAREHOLDER TRANSACTION EXPENSES ANNUAL FUND OPERATING EXPENSES Cash Purchase Premium (as a Redemption Fees Management Total Fund percentage of (as a percentage of Fees after Fee Other Operating amount invested)1 amount redeemed)2 Waiver3 Expenses3 Expenses3 Core Fund .17% None .45% .03% .48% Tobacco-Free Core Fund .17% None .23% .25% .48% Value Allocation Fund .15% None .56% .05% .61% Growth Allocation Fund .17% None .42% .06% .48% U.S. Sector Allocation Fund .17% None .40% .08% .48% Core II Secondaries Fund .75% .75% .39% .09% .48% Fundamental Value Fund .15% None .68% .07% .75% International Core Fund .75% None .59%7 .10%7 .69% Currency Hedged International Core Fund .75% None .43% .26%12 .69% Foreign Fund None None .57% .18%12 .75% International Small Companies Fund 1.25% .75% .47% .29% .76% Japan Fund .40% .70% .58%11 .30%9 .88% Emerging Markets Fund 1.60% .40%6 .98%7 .58%7 1.56% Global Hedged Equity Fund .60% 1.40%5 .61% .19%4 .80% Domestic Bond Fund None None .21% .04%4 .25% Short-Term Income Fund None None .01%13 .19% .20%13 International Bond Fund .15% None .19% .21% .40% Currency Hedged International Bond Fund .15% None .28% .12%4 .40% Global Bond Fund .15% None .05% .29%12 .34% Emerging Country Debt Fund .50% .25%8 .45% .17%10 .62% Core Emerging Country Debt Fund .40% None .00% .45%12 .45%
SCHEDULE OF FEES AND EXPENSES (Continued)
EXAMPLES You would pay the following expenses on a $1,000 invest- You would pay the following ment assuming 5% annual expenses on the same return with redemption at the investment assuming no end of each time period: redemption: 1Yr. 3 Yr. 5 Yr. 10 Yr. 1 Yr. 3 Yr. 5 Yr. 10 Yr. Core Fund $7 $17 $29 $62 $7 $17 $29 $62 Tobacco-Free Core Fund $7 $17 $29 $62 $7 $17 $29 $62 Value Allocation Fund $8 $21 $35 $78 $8 $21 $35 $78 Growth Allocation Fund $7 $17 $29 $62 $7 $17 $29 $62 U.S. Sector Allocation Fund $7 $17 $29 $62 $7 $17 $29 $62 Core II Secondaries Fund $20 $31 $43 $79 $12 $23 $34 $67 Fundamental Value Fund $9 $25 $43 $94 $9 $25 $43 $94 International Core Fund $15 $29 $46 $93 $15 $29 $46 $93 Currency Hedged International Core Fund $15 $29 $15 $29 Foreign Fund $8 $24 $8 $24 International Small Companies Fund $28 $45 $63 $117 $20 $36 $54 $106 Japan Fund $20 $40 $61 $122 $13 $32 $53 $112 Emerging Markets Fund $36 $69 $104 $204 $32 $65 $100 $199 Global Hedged Equity Fund $29 $47 $67 $125 $14 $31 $50 $104 Domestic Bond Fund $3 $8 $14 $32 $3 $8 $14 $32 Short-Term Income Fund $2 $6 $11 $26 $2 $6 $11 $26 International Bond Fund $6 $14 $24 $52 $6 $14 $24 $52 Currency Hedged International Bond Fund $6 $14 $24 $52 $6 $14 $24 $52 Global Bond Fund $5 $12 $5 $12 Emerging Country Debt Fund $14 $28 $42 $86 $11 $25 $38 $86 Core Emerging Country Debt Fund $9 $18 $9 $18
SCHEDULE OF FEES AND EXPENSES Footnotes 1 Applies only with respect to certain cash transactions as set forth under the heading "Purchase of Shares". The Manager may waive purchase premiums if there are minimal brokerage and transaction costs incurred in connection with the purchase. Normally, no purchase premium is charged with respect to in-kind purchases of Fund shares. However, in the case of in-kind purchases involving transfers of large positions in markets where the costs of re-registration and/or other transfer expenses are high, the International Core Fund, Currency Hedged International Core Fund, International Small Companies Fund, Japan Fund and Global Hedged Equity Fund may each charge a premium of 0.10% and the Emerging Markets Fund may charge a premium of 0.20%. 2 The Manager may waive redemption fees as set forth under the heading "Redemption of Shares" if there are minimal brokerage and transaction costs incurred in connection with the redemption. 3 The Manager has voluntarily undertaken to reduce its management fees and to bear certain expenses with respect to each Fund until further notice to the extent that a Fund's total annual operating expenses (excluding brokerage commissions, extraordinary expenses (including taxes), securities lending fees and expenses and transfer taxes; and, in the case of the Japan Fund, Emerging Markets Fund, Emerging Country Debt Fund and Global Hedged Equity Fund, excluding custodial fees; and, in the case of the Global Hedged Equity Fund only, also excluding hedging transaction fees) would otherwise exceed the percentage of that Fund's daily net assets specified below. Therefore so long as the Manager agrees so to reduce its fee and bear certain expenses, total annual operating expenses (subject to such exclusions) of the Fund will not exceed these stated limitations. The Manager has also voluntarily undertaken, until further notice, to limit its management fee for the Emerging Markets Fund to 0.98% regardless of the total operating expenses of the Fund. Absent such undertakings, management fees for each Fund and the annual operating expenses for each Fund would be as shown below.
Total Fund Voluntary Management Operating Expense Fee (Absent Expenses Fund Limit Waiver) (Absent Waiver) Core Fund .48% .525% .553% Tobacco-Free Core Fund .48% .50% .75% Value Allocation Fund .61% .70% .75% Growth Allocation Fund .48% .50% .56% U.S. Sector Allocation Fund .48% .49% .57% Core II Secondaries Fund .48% .50% .59% Fundamental Value Fund .75% .75% .82% International Core Fund .69% .75% .84% Currency Hedged International Core Fund .69% .75% 1.01% Foreign Fund .75% .75% .93% International Small Companies Fund .75% 1.25% 1.54% Japan Fund .69% .75% 1.05% Emerging Markets Fund 1.20% 1.00% 1.58% Global Hedged Equity Fund .65% .65% .84% Domestic Bond Fund .25% .25% .29% Short-Term Income Fund .20% .25% .44% International Bond Fund .40% .40% .61% Currency Hedged International Bond Fund .40% .50% .62% Global Bond Fund .34% .35% .64% Emerging Country Debt Fund .50% .50% .67% Core Emerging Country Debt Fund .45% .45% .90%
4 Based on estimated amounts for the Fund's first complete fiscal year based on actual expenses incurred through August 31, 1995. 5 May be reduced if it is not necessary to incur costs relating to the early termination of hedging transactions to meet redemption requests. 6 Applies only to shares acquired on or after June 1, 1995 (including shares acquired by reinvestment of dividends or other distributions on or after such date). 7 Figure based on actual expenses for the fiscal year ended February 28, 1995 but restated to give effect to a change in the fee waiver and/or expense limitation of the Fund, which change was effective as of June 27, 1995. 8 Applies only to shares acquired on or after July 1, 1995 (including shares acquired by reinvestment of dividends or other distributions on or after such date). 9 Restated to reflect higher expenses anticipated for the current fiscal year. 10 Based on estimated expenses during the year ended February 29, 1996. 11 Figure based on actual expenses for the fiscal year ended February 28, 1995, but restated to give effect to a change in the fee waiver and/or expense limitation of the Fund, which change is effective as of September 18, 1995. 12 Based on estimated amounts for the Fund's first fiscal year. 13 Figure based on actual expenses for fiscal year ended February 28, 1995, but restated to give effect to a change in the fee waiver and/or expense limitation of the Fund, which change was effective as of February 7, 1996. Unless otherwise noted, Annual Fund Operating Expenses shown are actual expenses for the year ended February 28, 1995. Where a purchase premium and/or redemption fee is indicated as being charged by a Fund in certain instances, the foregoing examples assume the payment of such purchase premium and/or redemption fee even though such purchase premium and/or redemption fee is not applicable in all cases. (See "Purchase of Shares" and "Redemption of Shares"). The purpose of the foregoing tables is to assist in understanding the various costs and expenses of each Fund that are borne by holders of Fund shares. THE FIVE PERCENT ANNUAL RETURN AND EXPENSE NUMBERS USED ARE NOT REPRESENTATIONS OF FUTURE PERFORMANCE OR EXPENSES: SUBJECT TO THE MANAGER'S UNDERTAKING TO WAIVE ITS FEE AND/OR BEAR CERTAIN EXPENSES FOR EACH FUND AS DESCRIBED IN THE FOREGOING TABLES, ACTUAL PERFORMANCE AND/OR EXPENSES MAY BE MORE OR LESS THAN SHOWN. FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
DOMESTIC EQUITY FUNDS CORE FUND Six Months Ended August 31, 1995 Year Ended February 28/29, (Unaudited) 1995 1994 1993 1992 1991 2 Net asset value, beginning of period $15.45 $ 15.78 $ 15.73 $ 15.96 $ 15.13 $ 13.90 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income 3 0.21 0.41 0.42 0.45 0.43 0.43 Net realized and unrealized gain (loss) on investments 2.82 0.66 1.59 1.13 1.55 1.74 ------ ------ ------ ------ ------ ------ Total from investment operations 3.03 1.07 2.01 1.58 1.98 2.17 ------ ------ ------ ------ ------ ------ Less distributions to shareholders: From net investment income (0.18) (0.39) (0.43) (0.46) (0.42) (0.51) From net realized gains (0.05) (1.01) (1.53) (1.35) (0.73) (0.43) ------ ------ ------ ------ ------ ------ Total distributions (0.23) (1.40) (1.96) (1.81) (1.15) (0.94) ------ ------ ------ ------ ------ ------ Net asset value, end of period $18.25 $ 15.45 $ 15.78 $ 15.73 $ 15.96 $ 15.13 ====== ====== ====== ====== ====== ====== Total Return 4 19.73% 7.45% 13.36% 10.57% 13.62% 16.52% Ratios/Supplemental Data: Net assets, end of period (000's) $2,895,124 $2,309,248 $1,942,005 $1,892,955 $2,520,710 $1,613,945 Net expenses to average daily net assets 3 0.48% 5 0.48% 0.48% 0.49% 0.50% 0.50% Net investment income to average daily net assets 3 2.44% 5 2.63% 2.56% 2.79% 2.90% 3.37% Portfolio turnover rate 37% 99% 40% 54% 39% 55%
CORE FUND (continued) Year Ended February 28/29, 1990 2 1989 2 1988 2 1987 2 1986 1, 2 Net asset value, beginning of period $ 14.47 $ 13.43 $ 15.24 $ 12.64 $ 10.00 ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income 3 0.65 0.54 0.45 0.34 0.11 Net realized and unrealized gain (loss) on investments 2.43 0.96 (0.92) 3.15 2.53 ------ ------ ------ ------ ------ Total from investment operations 3.08 1.50 (0.47) 3.49 2.64 ------ ------ ------ ------ ------ Less distributions to shareholders: From net investment income (0.70) (0.46) (0.38) (0.46) --.-- From net realized gains (2.95) --.-- (0.96) (0.43) --.-- ------ ------ ------ ------ ------ Total distributions (3.65) (0.46) (1.34) (0.89) --.-- ------ ------ ------ ------ ------ Net asset value, end of period $ 13.90 $ 14.47 $ 13.43 $ 15.24 $ 12.64 ====== ====== ====== ====== ====== Total Return 4 21.19% 11.49% (3.20%) 28.89% 26.46% Ratios/Supplemental Data: Net assets, end of period (000's) $1,016,965 $1,222,115 $1,010,014 $909,394 $266,734 Net expenses to average daily net assets 3 0.50% 0.50% 0.52% 0.53% 0.53% 5 Net investment income to average daily net assets 3 3.84% 4.02% 3.23% 3.06% 3.63% 5 Portfolio turnover rate 72% 51% 46% 75% 81% 1 For the period from the commencement of operations, September 25, 1985 to February 28, 1986. 2 The per share amounts and the number of shares outstanding have been restated to reflect a ten for one split effective December 31, 1990. 3 Net of fees and expenses voluntarily waived or borne by the Manager of $ .01 per share for each period presented. 4 Calculation excludes subscription fees. The total returns would have been lower had certain expenses not been waived during the periods shown. 5 Annualized.
Six Months Ended TOBACCO - FREE CORE FUND August 31, 1995 Year Ended February 28/29 (Unaudited) 1995 1994 1993 1992 1 Net asset value, beginning of period $10.65 $ 11.07 $ 11.35 $ 10.50 $ 10.00 ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income 2 0.15 0.23 0.34 0.31 0.12 Net realized and unrealized gain (loss) on investments 1.92 0.50 1.18 0.84 0.44 ------ ------ ------ ------ ------ Total from investment operations 2.07 0.73 1.52 1.15 0.56 ------ ------ ------ ------ ------ Less distributions to shareholders: From net investment income (0.08) (0.28) (0.35) (0.30) (0.06) From net realized gains (0.20) (0.87) (1.45) -.- -.- ------ ------ ------ ------ ------ Total distributions (0.28) (1.15) (1.80) (0.30) (0.06) ------ ------ ------ ------ ------ Net asset value, end of period $12.44 $ 10.65 $ 11.07 $ 11.35 $ 10.50 ====== ====== ====== ====== ====== Total Return 3 19.66% 7.36% 14.12% 11.20% 5.62% Ratios/Supplemental Data: Net assets, end of period (000's) $55,374 $47,969 $55,845 $85,232 $75,412 Net expenses to average daily net 0.48% 4 0.48% 0.48% 0.49% 0.49% assets 2 Net investment income to average daily net assets 2 2.47% 4 2.52% 2.42% 2.88% 3.77% 4 Portfolio turnover rate 43% 112% 38% 56% 0% 1 For the period from the commencement of operations, October 31, 1991 to February 29, 1992. 2 Net of fees and expenses voluntarily waived or borne by the Manager of $.02, $.03, $.03, $.02 and $.01 per share for the six months ended August 31, 1995, for the fiscal years 1995, 1994, and 1993 and for the period ended February 29, 1992, respectively. 3 Calculation excludes subscription fees. The total returns would have been lower had certain expenses not been waived during the periods shown. 4 Annualized. Except as otherwise noted, the above information has been audited by Price Waterhouse LLP, independent accountants. This statement should be read in conjunction with the other audited financial statements and related notes which are included in the Trust's Statement of Additional Information.
Six Months Ended VALUE ALLOCATION FUND August 31, 1995 Year Ended February 28/29, (Unaudited) 1995 1994 1993 1992 1991 1 Net asset value, beginning of period $12.05 $ 13.48 $ 13.50 $ 12.94 $ 12.25 $ 10.00 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income 2 0.21 0.41 0.43 0.38 0.40 0.12 Net realized and unrealized gain (loss) on investments 1.77 0.32 1.27 0.98 1.11 2.16 ------ ------ ------ ------ ------ ------ Total from investment operations 1.98 0.73 1.70 1.36 1.51 2.28 ------ ------ ------ ------ ------ ------ Less distributions to shareholders: From net investment income (0.18) (0.45) (0.40) (0.38) (0.41) (0.03) From net realized gains (0.20) (1.71) (1.32) (0.42) (0.41) --.-- ------ ------ ------ ------ ------ ------ Total distributions (0.38) (2.16) (1.72) (0.80) (0.82) (0.03) ------ ------ ------ ------ ------ ------ Net asset value, end of period $ 13.65 $ 12.05 $ 13.48 $ 13.50 $ 12.94 $ 12.25 ====== ====== ====== ====== ====== ====== Total Return 3 16.63% 6.85% 13.02% 11.01% 12.96% 22.85% Ratios/Supplemental Data: Net assets, end of period (000's) $311,995 $350,694 $679,532 $1,239,536 $644,136 $190,664 Net expenses to average daily net 0.61% 4 0.61% 0.61% 0.62% 0.67% 0.70% 4 assets 2 Net investment income to average daily net assets 2 2.85% 4 2.86% 2.70% 3.15% 3.75% 7.89% 4 Portfolio turnover rate 37% 77% 35% 50% 41% 23% 1 For the period from the commencement of operations, November 14, 1990 to February 28, 1991. 2 Net of fees and expenses voluntarily waived or borne by the Manager of $.01, $.02, $.02, $.01, $.01 and $.01 per share for the six months ended August 31, 1995, for the fiscal years 1995, 1994, 1993, and 1992 and for the period ended February 28, 1991, respectively. 3 Calculation excludes subscription fees. The total returns would have been lower had certain expenses not been waived during the periods shown. 4 Annualized.
Six Months Ended GROWTH ALLOCATION FUND August 31, 1995 Year Ended February 28/29, (Unaudited) 1995 1994 1993 1992 1991 1990 1989 1 Net asset value, beginning of period $ 4.45 $ 4.14 $ 4.55 $ 5.82 $ 14.54 $ 12.64 $ 10.49 $ 10.00 ------ ------ ------ ------ ------- ------ ------ ------ Income (loss) from investment operations: Net investment income 2 0.04 0.06 0.06 0.07 0.19 0.25 0.26 0.03 Net realized and unrealized gain (loss) on investments 0.74 0.38 0.11 0.17 1.63 2.61 2.40 0.46 ------ ------ ------ ------ ------- ------ ------ ------ Total from investment operations 0.78 0.44 0.17 0.24 1.82 2.86 2.66 0.49 ------ ------ ------ ------ ------- ------ ------ ------ Less distributions to shareholders: From net investment income (0.03) (0.06) (0.06) (0.08) (0.23) (0.25) (0.23) --.-- From net realized gains (0.16) (0.07) (0.52) (1.43) (10.31) (0.71) (0.28) --.-- ------ ------ ------ ------ ------- ------ ------ ------ Total distributions (0.19) (0.13) (0.58) (1.51) (10.54) (0.96) (0.51) --.-- ------ ------ ------ ------ ------- ------ ------ ------ Net asset value, end of period $ 5.04 $ 4.45 $ 4.14 $ 4.55 $ 5.82 $ 14.54 $ 12.64 $ 10.49 ====== ====== ====== ====== ======= ====== ====== ====== Total Return 3 17.67% 10.86% 4.13% 3.71% 20.47% 24.24% 25.35% 4.90% Ratios/Supplemental Data: Net assets, end of period (000's) $339,184 $239,006 $230,698 $168,143 $338,439 $1,004,345 $823,891 $291,406 Net expenses to average daily net 0.48% 4 0.48% 0.48% 0.49% 0.50% 0.50% 0.50% 0.08% 4 assets 2 Net investment income to average daily net assets 2 1.65% 4 1.50% 1.38% 1.15% 1.38% 1.91% 2.34% 0.52% 4 Portfolio turnover rate 30% 139% 57% 36% 46% 45% 57% 0% 1 For the period from the commencement of operations, December 28, 1988 to February 28, 1989. 2 Net of fees and expenses voluntarily waived or borne by the Manager of less than $.01 for each period presented. 3 Calculation excludes subscription fees. The total returns would have been lower had certain expenses not been waived during the periods shown. 4 Annualized. Except as otherwise noted, the above information has been audited by Price Waterhouse LLP, independent accountants. This statement should be read in conjunction with the other audited financial statements and related notes which are included in the Trust's Statement of Additional Information.
Six Months Ended U.S. SECTOR ALLOCATION FUND August 31, 1995 Year Ended February 28/29, (Unaudited) 1995 1994 1993 1 Net asset value, beginning of period $ 11.06 $ 11.26 $ 10.38 $ 10.00 ------ ------ ------ ------ Income (loss)from investment operations: Net investment income 2 0.16 0.28 0.29 0.05 Net realized and unrealized gain (loss) on investments 2.02 0.49 1.21 0.33 ------ ------ ------ ------ Total from investment operations 2.18 0.77 1.50 0.38 ------ ------ ------ ------ Less distributions to shareholders: From net investment income (0.12) (0.27) (0.30) --.-- From net realized gains (0.06) (0.70) (0.32) --.-- ------ ------ ------ ------ Total distributions (0.18) (0.97) (0.62) --.-- ------ ------ ------ ------ Net asset value, end of period $ 13.06 $ 11.06 $ 11.26 $ 10.38 ====== ====== ====== ====== Total Return 3 19.81% 7.56% 14.64% 3.80% Ratios/Supplemental Data: Net assets, end of period (000's) $235,792 $207,291 $167,028 $169,208 Net expenses to average daily net 0.48% 4 0.48% 0.48% 0.48% 4 assets 2 Net investment income to average daily net assets 2 2.42% 4 2.61% 2.56% 3.20%4 Portfolio turnover rate 37% 101% 53% 9% 1 For the period from the commencement of operations, January 4, 1993 to February 28, 1993. 2 Net of fees and expenses voluntarily waived or borne by the Manager of $.01 per share for each period presented. 3 Calculation excludes subscription fees. The total returns would have been lower had certain expenses not been waived during the periods shown. 4 Annualized.
Six Months Ended CORE II SECONDARIES FUND August 31, 1995 Year Ended February 28/29, (Unaudited) 1995 1994 1993 1992 1 Net asset value, beginning of period $ 13.61 $ 14.31 $ 12.68 $ 11.12 $ 10.00 ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income 2 0.14 0.20 0.21 0.22 0.04 Net realized and unrealized gain (loss) on investments 2.11 0.34 2.14 1.59 1.08 ------ ------ ------ ------ ------ Total from investment operations 2.24 0.54 2.35 1.81 1.12 ------ ------ ------ ------ ------ Less distributions to shareholders: From net investment income (0.11) (0.20) (0.22) (0.21) --.-- From net realized gains (0.82) (1.04) (0.50) (0.04) --.-- ------ ------ ------ ------ ------ Total distributions (0.93) (1.24) (0.72) (0.25) --.-- ------ ------ ------ ------ ------ Net asset value, end of period $ 14.92 $ 13.61 $ 14.31 $ 12.68 $ 11.12 ====== ====== ====== ====== ====== Total Return 3 17.03% 4.48% 18.97% 16.46% 11.20% Ratios/Supplemental Data: Net assets, end of period (000's) $151,753 $235,781 $151,286 $102,232 $58,258 Net expenses to average daily net 0.48% 4 0.48% 0.48% 0.49% 0.49% 4 assets 2 Net investment income to average daily net assets 2 1.53% 4 1.55% 1.66% 2.02% 2.19% 4 Portfolio turnover rate 49% 54% 30% 3% 0% 1 For the period from the commencement of operations, December 31, 1991 to February 29, 1992. 2 Net of fees and expenses voluntarily waived or borne by the Manager of $.01, $.01, $.02, $.02 and $.01 per share for the six months ended August 31, 1995, for the fiscal years 1995, 1994, and 1993 and for the period ended February 29, 1992, respectively. 3 Calculation excludes subscription and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. 4 Annualized. Except as otherwise noted, the above information has been audited by Price Waterhouse LLP, independent accountants. This statement should be read in conjunction with the other audited financial statements and related notes which are included in the Trust's Statement of Additional Information.
Six Months Ended FUNDAMENTAL VALUE FUND August 31, 1995 Year Ended February 28/29, (Unaudited) 1995 1994 1993 1992 1 Net asset value, beginning of period $ 12.54 $ 12.49 $ 11.71 $ 10.82 $ 10.00 ------ ------ ------ ------ ------ Income (loss)from investment operations: Net investment income 2 0.19 0.34 0.27 0.30 0.11 Net realized and unrealized gain (loss) on investments 1.69 0.55 1.64 1.32 0.77 ------ ------ ------ ------ ------ Total from investment operations 1.88 0.89 1.91 1.62 0.88 ------ ------ ------ ------ ------ Less distributions to shareholders: From net investment income (0.17) (0.32) (0.28) (0.30) (0.06) From net realized gains (0.23) (0.52) (0.85) (0.43) --.-- ------ ------ ------ ------ ------ Total distributions (0.40) (0.84) (1.13) (0.73) (0.06) ------ ------ ------ ------ ------ Net asset value, end of period $ 14.02 $ 12.54 $ 12.49 $ 11.71 $ 10.82 ====== ====== ====== ====== ====== Total Return 3 15.17% 7.75% 16.78% 15.66% 8.87% Ratios/Supplemental Data: Net assets, end of period (000's) $197,570 $182,871 $147,767 $62,339 $32,252 Net expenses to average daily net 0.75% 4 0.75% 0.75% 0.73% 0.62% 4 assets 2 Net investment income to average daily net assets 2 2.81% 4 2.84% 2.32% 2.77% 3.43% 4 Portfolio turnover rate 15% 49% 65% 83% 33% 1 For the period from the commencement of operations, October 31, 1991 to February 29, 1992. 2 Net of fees and expenses voluntarily waived or borne by the Manager of less than $.01, $.01, $.01, $.03 and $.03 per share for the six months ended August 31, 1995, for the fiscal years 1995, 1994, and 1993 and for the period ended February 29, 1992, respectively. 3 Calculation excludes subscription fees. The total returns would have been lower had certain expenses not been waived during the periods shown. 4 Annualized.
INTERNATIONAL EQUITY FUNDS Six Months Ended INTERNATIONAL CORE FUND August 31, 1995 Year Ended February 28/29, (Unaudited) 1995 1994 1993 1992 1991 1990 1989 1988 1 Net asset value, beginning of period $ 22.32 $ 25.56 $ 18.51 $ 18.80 $ 18.73 $ 18.79 $ 17.22 $ 14.76 $ 15.00 ------ ------ ------ ------ ------ ------ ------ ------ ------ Income (loss)from investment operations: Net investment income 2 0.30 0.27 0.29 0.29 0.29 0.55 0.49 0.45 0.18 Net realized and unrealized gain(loss) on investments 1.72 (1.57) 7.44 (0.04) 0.22 0.69 1.93 3.37 (0.03) ------ ------ ------ ------ ------ ------ ------ ------ ------ Total from investment operations 2.02 (1.30) 7.73 0.25 0.51 1.24 2.42 3.82 0.15 ------ ------ ------ ------ ------ ------ ------ ------ ------ Less distributions to shareholders: From net investment income (0.03) (0.35) (0.27) (0.20) (0.28) (0.54) (0.55) (0.45) (0.05) From net realized gains (0.66) (1.59) (0.41) (0.34) (0.16) (0.76) (0.30) (0.91) (0.34) ------ ------ ------ ------ ------ ------ ------ ------ ------ Total distributions (0.69) (1.94) (0.68) (0.54) (0.44) (1.30) (0.85) (1.36) (0.39) ------ ------ ------ ------ ------ ------ ------ ------ ------ Net asset value, end of period $ 23.65 $22.32 $25.56 $18.51 $18.80 $18.73 $18.79 $17.22 $14.76 ====== ======= ======= ======= ======= ======= ======= ======= ====== Total Return 3 9.05% (5.31%) 42.10% 1.43% 2.84% 7.44% 13.99% 26.35% 1.07% Ratios/Supplemental Data: Net assets, end of period (000's) $3,326,025 $2,591,646 $2,286,431 $918,332 $414,341 $173,792 $101,376 $35,636 $11,909 Net expenses to average 0.70% 5 0.70% 0.71%4 0.70% 0.70% 0.78% 0.80% 0.88% 0.70% 5 daily net assets 2 Net investment income to average daily net assets 2 2.81% 5 1.48% 1.48% 2.36% 2.36% 3.32% 3.17% 3.19% 1.27% 5 Portfolio turnover rate 6% 53% 23% 23% 35% 81% 45% 37% 129% 1 For the period from the commencement of operations, April 7, 1987 to February 29, 1988. 2 Net of fees and expenses voluntarily waived or borne by the Manager of $.02, $.03, $.03, $.03, $.02, $.01, $.02, $.05 and $.08 per share for the six months ended August 31, 1995, for the fiscal years 1995, 1994, 1993, 1992, 1991, 1990, and 1989 and for the period ended February 29, 1988, respectively. 3 Calculation excludes subscription fees. The total returns would have been lower had certain expenses not been waived during the periods shown. 4 Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .01% of average daily net assets. 5 Annualized. Except as otherwise noted, the above information has been audited by Price Waterhouse LLP, independent accountants. This statement should be read in conjunction with the other audited financial statements and related notes which are included in the Trust's Statement of Additional Information.
Period from CURRENCY HEDGED INTERNATIONAL CORE FUND June 30, 1995 (commencement of operations) to August 31, 1995 (Unaudited) Net asset value, beginning of period $ 10.00 ------ Income from investment operations: Net investment income 1 -.- Net realized and unrealized gain (loss) on investments 0.80 ------ Total from investment operations 0.80 ------ Net asset value, end of period $ 10.80 ====== Total Return 2 8.00% Ratios/Supplemental Data: Net assets, end of period (000's) $189,848 Net expenses to average daily net 0.70%3,4 assets 1 Net investment income to average daily net assets 1 0.91%4 Portfolio turnover rate -.- 1 Net of fees and expenses voluntarily waived or borne by the Manager of less than $.01 per share. 2 Calculation excludes subscription fees. The total return would have been lower had certain expenses not been waived during the period shown. 3 Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .01% of average daily net assets. 4 Annualized.
Six Months Ended INTERNATIONAL SMALL COMPANIES FUND August 31, 1995 Year Ended February 28/29, (Unaudited) 1995 1994 1993 1992 1 Net asset value, beginning of period $ 11.95 $ 14.45 $ 8.91 $ 9.62 $ 10.00 ------ ------ ------ ------ ------ Income (loss)from investment operations: Net investment income 2 0.15 0.18 0.15 0.35 0.06 Net realized and unrealized gain (loss) on investments 0.65 (1.52) 5.59 (0.68) (0.43) ------ ------ ------ ------ ------ Total from investment operations 0.80 (1.34) 5.74 (0.33) (0.37) ------ ------ ------ ------ ------ Less distributions to shareholders: From net investment income --.-- (0.20) (0.12) (0.38) (0.01) From net realized gains (0.07) (0.96) (0.08) --.-- --.-- ------ ------ ------ ------ ------ Total distributions (0.07) (1.16) (0.20) (0.38) (0.01) ------ ------ ------ ------ ------ Net asset value, end of period $ 12.68 $ 11.95 $ 14.45 $ 8.91 $ 9.62 ====== ====== ====== ====== ====== Total Return 3 6.69% (9.66%) 64.67% (3.30%) (3.73%) Ratios/Supplemental Data: Net assets, end of period (000's) $199,024 $186,185 $132,645 $35,802 $24,467 Net expenses to average daily net 0.75% 5 0.76%4 0.75% 0.75% 0.85% 5 assets 2 Net investment income to average daily net assets 2 2.52% 5 1.45% 1.50% 4.02% 1.91% 5 Portfolio turnover rate 5% 58% 38% 20% 1% 1 For the period from the commencement of operations, October 15, 1991 to February 29, 1992. 2 Net of fees and expenses voluntarily waived or borne by the Manager of $.05, $.08, $.09, $.09 and $.05 per share for the six months ended August 31, 1995, for the fiscal years 1995, 1994, and 1993 and for the period ended February 29, 1992, respectively. 3 Calculation excludes subscription and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. 4 Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .01% of average daily net assets. 5 Annualized. Except as otherwise noted, the above information has been audited by Price Waterhouse LLP, independent accountants. This statement should be read in conjunction with the other audited financial statements and related notes which are included in the Trust's Statement of Additional Information.
Six Months Ended JAPAN FUND August 31, 1995 Year Ended February 28/29, (Unaudited) 1995 1994 1993 1992 1991 1 Net asset value, beginning of period $ 9.12 $ 11.13 $ 7.37 $ 7.73 $ 9.48 $ 10.00 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income (loss) 2 --.-- --.-- 3 --.-- 0.01 --.-- (0.01) Net realized and unrealized gain (loss) on investments 0.57 (1.08) 3.94 (0.36) (1.74) (0.39) ------ ------ ------ ------ ------ ------ Total from investment operations 0.57 (1.08) 3.94 (0.35) (1.74) (0.40) ------ ------ ------ ------ ------ ------ Less distributions to shareholders: From net investment income --.-- --.-- --.-- (0.01) --.-- --.-- In excess of net investment income --.-- --.-- (0.01) --.-- --.-- --.-- From net realized gains --.-- (0.93) (0.17) --.-- --.-- --.-- From paid-in capital 4 --.-- --.-- --.-- --.-- (0.01) (0.12) ------ ------ ------ ------ ------ ------ Total distributions --.-- (0.93) (0.18) (0.01) (0.01) (0.12) ------ ------ ------ ------ ------ ------ Net asset value, end of period $ 9.69 $ 9.12 $ 11.13 $ 7.37 $ 7.73 $ 9.48 ====== ====== ====== ====== ====== ====== Total Return 5 6.25% (10.62%) 53.95% (4.49%) (18.42%) (3.79%) Ratios/Supplemental Data: Net assets, end of period (000's) $100,134 $60,123 $450,351 $306,423 $129,560 $60,509 Net expenses to average daily net 1.00%6 0.83% 0.87% 0.88% 0.93% 0.95%6 assets2 Net investment income to average daily net assets2 (0.03%)6 (0.02%) (0.01%) 0.12% (0.11%) (0.32%)6 Portfolio turnover rate 0% 60% 8% 17% 25% 11% 1 For the period from the commencement of operations, June 8, 1990 to February 28, 1991. 2 Net of fees and expenses voluntarily waived or borne by the Manager of $.01 per share for each period presented. 3 Based on average month end shares outstanding. 4 Return of capital for book purposes only. A distribution was required for tax purposes to avoid the payment of federal excise tax. 5 Calculation excludes subscription and redemptions fees. The total returns would have been lower had certain expenses not been waived during the periods shown. 6 Annualized.
Period from December 9, EMERGING MARKETS FUND 1993 Year Ended (commencement of Six Months Ended February 28, operations) to August 31, 1995 1995 February 28, (Unuadited) 1994 Net asset value, beginning of period $ 9.52 $ 12.13 $ 10.00 ------ ------- ------ Income (loss) from investment operations: Net investment income 0.11 1 0.05 0.02 1 Net realized and unrealized gain (loss) on investments 1.03 (2.37) 2.11 ------ ------- ------ Total from investment operations 1.14 (2.32) 2.13 Less distributions to shareholders: From net investment income -.- (0.07) (0.00) 2 From net realized gains (0.13) (0.22) (0.00) ------ ------- ------ Total distributions (0.13) (0.29) (0.00) ------ ------- ------ Net asset value, end of period $ 10.53 $ 9.52 $ 12.13 ====== ======= ====== Total Return 3 12.03% (19.51%) 21.35% Ratios/Supplemental Data: Net assets, end of period (000's) $609,630 $384,259 $114,409 Net expenses to average daily net 1.42% 1,4 1.58% 1.64% 1,4 assets Net investment income to average daily net assets 2.61% 1,4 0.85% 0.87% 1,4 Portfolio turnover rate 26% 50% 2% 1 Net of fees and expenses voluntarily waived or borne by the Manager of less than $.01 and $.003 per share for the six months ended August 31, 1995 and for the period ended February 28, 1994, respectively. 2 The per share income distribution was $0.004. 3 Calculation excludes subscription and redemption fees. The total returns for the period ended February 28, 1994 would have been lower had certain expenses not been waived during the periods shown. 4 Annualized. Except as otherwise noted, the above information has been audited by Price Waterhouse LLP, independent accountants. This statement should be read in conjunction with the other audited financial statements and related notes which are included in the Trust's Statement of Additional Information.
Period from GLOBAL HEDGED EQUITY FUND July 29, 1994 (commencement Six Months Ended of operations) August 31, 1995 to February (Unaudited) 28, 1995 Net asset value, beginning of period $ 10.12 $ 10.00 ------ ------ Income (loss) from investment operations: Net investment income 1 0.12 0.11 Net realized and unrealized gain (loss) on investments 0.29 0.08 ------ ------ Total from investment operations 0.41 0.19 ------ ------ Less distributions to shareholders: From net investment income (0.03) (0.07) ------ ------ Total distributions (0.03) (0.07) ------ ------ Net asset value, end of period $ 10.50 $ 10.12 ====== ====== Total Return 2 4.01% 1.92% Ratios/Supplemental Data: Net assets, end of period (000's) $340,697 $214,638 Net expenses to average daily net 0.77%3 0.92%3 assets 1 Net investment income to average daily net assets 1 3.07%3 2.85%3 Portfolio turnover rate 67% 194% 1 Net of fees and expenses voluntarily waived or borne by the Manager of $.002 and $.006 per share for the six months ended August 31, 1995 and for the period ended February 28, 1995, respectively. 2 Calculation excludes subscription and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. 3 Annualized.
FIXED INCOME FUNDS
Period from August 18, 1994 DOMESTIC BOND FUND (commencement Six Months Ended of operations) August 31, 1995 to February (Unaudited) 28, 1995 Net asset value, beginning of period $ 10.13 $ 10.00 ------ ------ Income (loss) from investment operations: Net investment income 1 0.33 0.24 Net realized and unrealized gain (loss) on investments 0.49 0.07 ------ ------ Total from investment operations 0.82 0.31 ------ ------ Less distributions to shareholders: From net investment income (0.27) (0.18) From net realized gains (0.05) -.- ------ ------ Total distributions (0.32) (0.18) ------ ------ Net asset value, end of period $ 10.63 $ 10.13 ====== ====== Total Return 2 8.15% 3.16% Ratios/Supplemental Data: Net assets, end of period (000's) $293,426 $209,377 Net expenses to average daily net 0.25%3 0.25%3 assets 1 Net investment income to average daily net assets 1 6.65%3 6.96%3 Portfolio turnover rate 34% 65% 1 Net of fees and expenses voluntarily waived or borne by the Manager of less than $.01 and $.01 per share for the six months ended August 31, 1995 and for the period ended February 28, 1994, respectively. 2 The total returns would have been lower had certain expenses not been waived during the periods shown. 3 Annualized. Except as otherwise noted, the above information has been audited by Price Waterhouse LLP, independent accountants. This statement should be read in conjunction with the other audited financial statements and related notes which are included in the Trust's Statement of Additional Information.
Six Months Ended SHORT-TERM INCOME FUND August 31, 1995 Year Ended February 28/29, (Unaudited) 1995 1994 1993 1992 3 1991 1,2,3 Net asset value, beginning of period $ 9.56 $ 9.79 $ 10.05 $ 10.11 $ 10.00 $ 10.00 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income 4 0.33 0.63 0.44 0.46 0.56 0.67 Net realized and unrealized gain (loss) on investments 0.10 (0.28) (0.09) 0.30 0.11 --.-- ------ ------ ------ ------ ------ ------ Total from investment operations 0.43 0.35 0.35 0.76 0.67 0.67 ------ ------ ------ ------ ------ ------ Less distributions to shareholders: From net investment income (0.34) (0.58) (0.46) (0.38) (0.56) (0.67) From net realized gains --.-- --.-- (0.15) (0.44) --.-- --.-- ------ ------ ------ ------ ------ ------ Total distributions (0.34) (0.58) (0.61) (0.82) (0.56) (0.67) ------ ------ ------ ------ ------ ------ Net asset value, end of period $ 9.65 $ 9.56 $ 9.79 $ 10.05 $ 10.11 $ 10.00 ====== ====== ====== ====== ====== ====== Total Return 5 4.59% 3.78% 3.54% 8.25% 11.88% 3.83% Ratios/Supplemental Data: Net assets, end of period (000's) $6,733 $8,193 $8,095 $10,499 $9,257 $40,850 Net expenses to average daily net 0.25%6 0.25% 0.25% 0.25% 0.25% 0.25%6 assets 4 Net investment income to average daily net assets 4 6.51%6 5.02% 4.35% 4.94% 5.83% 7.88%6 Portfolio turnover rate 7% 335% 243% 649% 135% --.-- 1 For the period from the commencement of operations, April 17, 1990 to February 28, 1991. 2 The per share amounts and the number of shares outstanding have been restated to reflect a one for ten reverse stock split effective December 1, 1991. 3 The Fund operated as a money market fund from April 17, 1990 until June 30, 1991. Subsequently, the Fund became a short-term income fund. 4 Net of fees and expenses voluntarily waived or borne by the manager of $.02, $.02, $.02, $.03, $.03 and $.09 per share for the six months ended August 31, 1995, for the fiscal years 1995, 1994, 1993, and 1992 and for the period ended February 28, 1991, respectively. 5 The total returns would have been lower had certain expenses not been waived during the periods shown. 6 Annualized.
Period from December 22, INTERNATIONAL BOND FUND 1993 Year Ended (commencement of Six Months Ended February 28, operations) to August 31, 1995 1995 February 28, (Unaudited) 1994 Net asset value, beginning of period $ 9.64 $ 9.96 $ 10.00 ------ ------ ------ Income (loss) from investment operations: Net investment income 1 0.41 0.98 0.08 Net realized and unrealized gain (loss) on investments 0.90 (0.21) (0.12) ------ ------ ------ Total from investment operations 1.31 0.77 (0.04) ------ ------ ------ Less distributions to shareholders: From net investment income (0.00)3 (0.75) --.-- From net realized gains (0.26) (0.34) --.-- ------ ------ ------ Total distributions (0.26) (1.09) --.-- ------- ------ ------ Net asset value, end of period $ 10.69 $ 9.64 $ 9.96 ====== ====== ====== Total Return 2 13.56% 8.23% (0.40%) Ratios/Supplemental Data: Net assets, end of period (000's) $190,684 $151,189 $39,450 Net expenses to average daily net 0.40%4 0.40% 0.40%4 assets Net investment income to average daily net assets 7.99%4 7.51% 5.34%4 Portfolio turnover rate 40% 141% 14% 1 Net of fees and expenses voluntarily waived or borne by the Manager of $.01, $.02 and $.01 per share for the six months ended August 31, 1995, for the fiscal year 1995 and for the period ended February 28, 1994, respectively. 2 Calculation excludes subscription fees. The total returns would have been lower had certain expenses not been waived during the periods shown. 3 The per share income distribution was $0.003. 4 Annualized. Except as otherwise noted, the above information has been audited by Price Waterhouse LLP, independent accountants. This statement should be read in conjunction with the other audited financial statements and related notes which are included in the Trust's Statement of Additional Information.
Period from CURRENCY HEDGED INTERNATIONAL BOND FUND September 30, 1994 (commencement Six Months Ended of operations) August 31, 1995 to February (Unaudited) 28, 1995 Net asset value, beginning of period $ 9.99 $ 10.00 ------ ------ Income (loss) from investment operations: Net investment income 1 0.56 0.24 Net realized and unrealized gain (loss) on investments 1.03 (0.09) ------ ------ Total from investment operations 1.59 0.15 ------ ------ Less distributions to shareholders: From net investment income (0.17) (0.16) ------ ------ From net realized gains (0.00) 3 --.-- ------ ------ Total distributions (0.17) (0.16) ----- ----- Net asset value, end of period $ 11.41 $ 9.99 ====== ====== Total Return 2 16.02% 1.49% Ratios/Supplemental Data: Net assets, end of period (000's) $223,926 $238,664 Net expenses to average daily net 0.40%4 0.40%3 assets 1 Net investment income to average daily net assets 1 8.81%4 8.46%3 Portfolio turnover rate 57% 64% 1 Net of fees and expenses voluntarily waived or borne by the Manager of $.02 and $.01 per share for the six months ended August 31, 1995 and for the period ended February 28, 1995, respectively. 2 Calculation excludes subscription fees. The total returns would have been lower had certain expenses not been waived during the periods shown. 3 The per share capital gain distribution was $.002. 4 Annualized.
Period from EMERGING COUNTRY DEBT FUND April 19, 1994 (commencement Six Months Ended of operations) August 31, 1995 to February (Unaudited) 28, 1995 Net asset value, beginning of period $ 8.39 $ 10.00 ------ ------ Income (loss) from investment operations: Net investment income 1 0.64 0.48 Net realized and unrealized gain (loss) on investments 1.96 (1.59) ------ ------ Total from investment operations 2.60 (1.11) ------ ------ Less distributions to shareholders: From net investment income (0.08) (0.40) From net realized gains -.- (0.10) ------ ------ Total distributions (0.08) (0.50) ------ ------ Net asset value, end of period $ 10.91 $ 8.39 ====== ======= Total Return 2 30.99% (11.65%) Ratios/Supplemental Data: Net assets, end of period (000's) $507,804 $243,451 Net expenses to average daily net 0.50%3 0.50%3 assets 1 Net investment income to average daily net assets 1 14.73%3 10.57%3 Portfolio turnover rate 89% 104% 1 Net of fees and expenses voluntarily waived or borne by the Manager of $.01 per share for each period presented. 2 Calculation excludes subscription and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. 3 Annualized. Except as otherwise noted, the above information has been audited by Price Waterhouse LLP, independent accountants. This statement should be read in conjunction with the other audited financial statements and related notes which are included in the Trust's Statement of Additional Information.
The Manager's discussion of the performance of each Fund in fiscal 1995, as well as a comparison of each Fund's performance over the life of the Fund with that of a benchmark securities index elected by the Manager, is included in each Fund's Annual Report for the fiscal year ended February 28, 1995. Copies of the Annual Reports are available upon request without charge. INVESTMENT OBJECTIVES AND POLICIES The investment objective of each of the Core Fund, the Value Allocation Fund, the Growth Allocation Fund, the Short-Term Income Fund, the International Core Fund, and the Japan Fund is fundamental and may not be changed without shareholder approval. The investment objective of each other Fund may be changed without shareholder approval. Except for investment policies which are explicitly described as fundamental, the investment policies of each Fund may be changed without shareholder approval. There can be no assurance that the investment objective of any Fund will be achieved. As is noted below, several of the Funds seek a total return greater than the S&P 500. The S&P 500 is an unmanaged weighted index of the common stock performance of 500 industrial, transportation, utility and financial companies selected for inclusion in the Index by Standard & Poor's Corporation on a statistical basis. For over 25 years, investors have used the S&P 500 against which to measure the performance of their portfolios because it is generally believed by knowledgeable investors that the S&P 500 combines the breadth, weight and statistical integrity needed to reflect overall market activity. The International Equity Funds, together with the International Bond Fund, Currency Hedged International Bond Fund, Global Bond Fund, Emerging Country Debt Fund, and Core Emerging Country Debt Fund are sometimes collectively referred to as the "International Funds." DOMESTIC EQUITY FUNDS CORE FUND The Core Fund seeks a total return greater than that of the S&P 500 through investment in common stocks. The Core Fund expects that substantially all of its assets will be invested in the equity securities of at least 125 companies chosen from among the approximately 1,200 companies with the largest equity capitalization (i.e., number of shares outstanding multiplied by the market price per share) at the time of investment which are also listed on a United States national securities exchange (the "Large Cap 1200"). The Core Fund may, from time to time, invest in fewer issuers if, in the opinion of the Manager, there are not at least 125 attractive investment opportunities from among such companies. The Manager will select which issuers to invest in based on its assessment of whether the common stock of the issuer is likely to perform better than the S&P 500. Since the Core Fund's portfolio investments will not be chosen and proportionately weighted to approximate the total return of the S&P 500, the total return of the Core Fund may be more or less than the total return of the S&P 500. An investment in the Fund involves risks similar to investing in common stocks directly. In pursuing its objective, the Fund may invest in securities of foreign issuers traded principally on U.S. securities exchanges, invest without limit in depository receipts of foreign issuers, and purchase convertible securities. The Fund may also invest up to 15% of its net assets in illiquid securities, lend portfolio securities valued at up to one-third of total assets, and enter into repurchase agreements. In addition, the Fund may purchase index futures on the S&P 500 and other domestic indices for investment, anticipatory hedging and risk management and to effect synthetic sales and purchases. The Fund may also buy exchange traded or over-the-counter put and call options, sell (write) covered options and enter into futures contracts and options on futures contracts for hedging and risk management. The Fund may also use equity swap contracts and contracts for differences for these purposes. It is a policy of the Fund to stay fully invested in common stocks, index futures, equity swap contracts and contracts for differences even when the Manager believes that equity securities generally may underperform other types of investments. The Fund expects that, not including the margin deposits or the segregated accounts created in connection with index futures and other derivatives, less than 5% of its total net assets will be invested in high quality money market instruments such as securities issued by the U.S. government and agencies thereof, bankers' acceptances, commercial paper, and bank certificates of deposit. The Fund will at all times invest at least 65% of its total assets in domestic common stocks. The Fund does not expect to invest in long or short-term fixed income securities for temporary defensive purposes. For a detailed description of the investment practices described in the three preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices." TOBACCO-FREE CORE FUND The Tobacco-Free Core Fund seeks a total return greater than that of the S&P 500 through investment in common stocks chosen from the Large Cap 1200 and which are not Tobacco Producing Issuers. The Tobacco-Free Core Fund expects that substantially all of its assets will be invested in the securities of at least 125 companies chosen from the Large Cap 1200. The Tobacco-Free Core Fund may, from time to time, invest in fewer issues if, in the opinion of the Manager, there are not at least 125 attractive investment opportunities from among such companies. The Manager will select which issuers to invest in based on its assessment of whether the common stock of the issuer is likely to perform better than the S&P 500. Since the Tobacco-Free Core Fund's portfolio investments will not be chosen and proportionately weighted to approximate the total return of the S&P 500, the total return of the Tobacco-Free Core Fund may be more or less than the total return of the S&P 500. An investment in the Fund involves risks similar to investing in common stocks directly. The Manager has instituted procedures to avoid investment by the Tobacco-Free Core Fund in the securities of issuers which, at the time of purchase, derive more than 10% of their gross revenues from the production of tobacco-related products ("Tobacco Producing Issuers"). For this purpose the Manager will subscribe to and generally rely on information services provided by third parties, although the Manager may cause the Tobacco-Free Core Fund to purchase securities of issuers which are identified by those third parties as Tobacco Producing Issuers if, at the time of purchase, the Manager has received information from the issuer to the effect that it is no longer a Tobacco Producing Issuer. The Tobacco-Free Core Fund is required to have a fundamental policy, which cannot be changed without shareholder approval, that under normal market conditions at least 65% of its assets will be invested in the securities of issuers other than Tobacco Producing Issuers. The requirements of this policy are not, however, expected to affect the Manager's overall approach of not investing in Tobacco Producing Issuers. In pursuing its objective, the Fund may invest in securities of foreign issuers traded principally on U.S. securities exchanges, invest without limit in depository receipts of foreign issuers, and purchase convertible securities. The Fund may also invest up to 15% of its net assets in illiquid securities, lend portfolio securities valued at up to one-third of total assets, and enter into repurchase agreements. In addition, the Fund may purchase index futures on the S&P 500 and other domestic indices for investment, anticipatory hedging and risk management and to effect synthetic sales and purchases. The Fund may also buy exchange traded or over-the-counter put and call options, sell (write) covered options and enter into futures contracts and options on futures contracts for hedging and risk management. The Fund may also use equity swap contracts and contracts for differences for these purposes. It is a policy of the Fund to stay fully invested in common stocks, index futures, equity swap contracts and contracts for differences even when the Manager believes that equity securities generally may underperform other types of investments. The Fund expects that, not including the margin deposits or the segregated accounts created in connection with index futures and other derivatives, less than 5% of its total net assets will be invested in high quality money market instruments such as securities issued by the U.S. government and agencies thereof, bankers' acceptances, commercial paper, and bank certificates of deposit. The Fund will at all times invest at least 65% of its total assets in domestic common stocks. The Fund does not expect to invest in long or short-term fixed income securities for temporary defensive purposes. For a detailed description of the investment practices described in the three preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices". VALUE ALLOCATION FUND The Value Allocation Fund seeks a total return greater than that of the S&P 500 through investment in a broadly diversified and liquid portfolio of common stocks chosen from the Large Cap 1200. The Fund expects that any income it derives will be from dividends on common stock. The Manager will select which issuers to invest in based on its assessment of whether the common stock of the issuer is likely to perform better than the S&P 500. Strong consideration is given to common stocks whose current prices do not adequately reflect, in the opinion of the Manager, the ongoing business value of the underlying company. The Fund's investments are made in securities of companies which, in the opinion of the Manager, are of average or above average investment quality. Investment quality is evaluated using fundamental analysis emphasizing each issuer's historic financial performance,balance sheet strength, management capability and competitive position. Various valuation parameters are examined to determine the attractiveness of individual securities. Since the Fund's portfolio investments will not be chosen and proportionately weighted to approximate the total return of the S&P 500, at times the total return of the Value Allocation Fund may be more or less than the total return of the S&P 500. In pursuing its objective, the Fund may invest in securities of foreign issuers traded principally on U.S. securities exchanges, invest without limit in depository receipts of foreign issuers, and purchase convertible securities. The Fund may also invest up to 15% of its net assets in illiquid securities, lend portfolio securities valued at up to one-third of total assets, and enter into repurchase agreements. In addition, the Fund may purchase index futures on the S&P 500 and other domestic indices for investment, anticipatory hedging and risk management and to effect synthetic sales and purchases. The Fund may also buy exchange traded or over-the-counter put and call options, sell (write) covered options and enter into futures contracts and options on futures contracts for hedging and risk management. The Fund may also use equity swap contracts and contracts for differences for these purposes. It is a policy of the Fund to stay fully invested in common stocks, index futures, equity swap contracts and contracts for differences even when the Manager believes that equity securities generally may underperform other types of investments. The Fund expects that, not including the margin deposits or the segregated accounts created in connection with index futures and other derivatives, less than 5% of its total net assets will be invested in high quality money market instruments such as securities issued by the U.S. government and agencies thereof, bankers' acceptances, commercial paper, and bank certificates of deposit. The Fund will at all times invest at least 65% of its total assets in domestic common stocks. The Fund does not expect to invest in long or short-term fixed income securities for temporary defensive purposes. For a detailed description of the investment practices described in the three preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices." GROWTH ALLOCATION FUND The Growth Allocation Fund seeks long-term growth of capital. Current income is only an incidental consideration. The Growth Allocation Fund attempts to achieve its objective by investing in companies whose earnings per share are expected by the Manager to grow at a rate faster than the average of the Large Cap 1200. The Fund is designed for investors who wish to allocate a portion of their assets to investment in growth-oriented stocks. The Fund expects that at least 65% of its assets will be invested in the common stocks (and securities convertible into common stocks) of issuers chosen from the Large Cap 1200. Such companies may include foreign issuers, although the Fund does not intend to invest in securities which are principally traded outside of the United States. The balance of the common stocks (and securities convertible into common stocks) held by the Fund may be less liquid investments since the companies in question will have smaller equity capitalization and/or the securities may not be listed on a national securities exchange. In pursuing its objective, the Fund may invest in securities of foreign issuers traded principally on U.S. securities exchanges, invest without limit in depository receipts of foreign issuers, and purchase convertible securities. The Fund may also invest up to 15% of its net assets in illiquid securities, lend portfolio securities valued at up to one-third of total assets, and enter into repurchase agreements. In addition, the Fund may purchase index futures on the S&P 500 and other domestic indices for investment, anticipatory hedging and risk management and to effect synthetic sales and purchases. The Fund may also buy exchange traded or over-the-counter put and call options, sell (write) covered options and enter into futures contracts and options on futures contracts for hedging and risk management. The Fund may also use equity swap contracts and contracts for differences for these purposes. It is a policy of the Fund to stay fully invested in common stocks, index futures, equity swap contracts and contracts for differences even when the Manager believes that equity securities generally may underperform other types of investments. The Fund expects that, not including the margin deposits or the segregated accounts created in connection with index futures and other derivatives, less than 5% of its total net assets will be invested in the high quality money market instruments such as securities issued by the U.S. government and agencies thereof, bankers' acceptances, commercial paper, and bank certificates of deposit. The Fund will at all times invest at least 65% of its total assets in domestic common stocks. The Fund does not expect to invest in long or short-term fixed income securities for temporary defensive purposes. For a detailed description of the investment practices described in the three preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices." U.S. SECTOR ALLOCATION FUND The U.S. Sector Allocation Fund seeks a total return greater than that of the S&P 500 through investment in common stocks chosen from among the 1,800 companies with the largest equity capitalization whose securities are listed on United States national securities exchanges. The Fund will allocate its assets, as directed by the Manager, among major U.S. sectors (inlcuding value, growth, small/large capitalization and defensive stocks, stocks in individual industries, etc.) and will overweight those sectors which the Manager believes may outperform the S&P 500 generally. The Fund may place varying degrees of emphasis on different types of companies depending on the Manager's assessment of economic and market conditions, including companies with superior growth prospects and/or companies whose common stock does not, in the opinion of the Manager, adequately reflect the companies' ongoing business value. The Fund may invest in companies with smaller equity capitalization than the companies whose securities are purchased by the Value Allocation Fund and the Growth Allocation Fund. The securities of small capitalization companies may be less liquid and their market prices more volatile than those issued by companies with larger equity capitalizations. Since the Fund's portfolio investments will not be chosen and proportionately weighted to approximate the S&P 500, the total return of the U.S. Sector Allocation Fund may be more or less than the total return of the S&P 500. In pursuing its objective, the Fund may invest in securities of foreign issuers traded principally on U.S. securities exchanges, invest without limit in depository receipts of foreign issuers, and purchase convertible securities. The Fund may also invest up to 15% of its net assets in illiquid securities, lend portfolio securities valued at up to one-third of total assets, and enter into repurchase agreements. In addition, the Fund may purchase index futures on the S&P 500 and other domestic indices for investment, anticipatory hedging and risk management and to effect synthetic sales and purchases. The Fund may also buy exchange traded or over-the-counter put and call options, sell (write) covered options and enter into futures contracts and options on futures contracts for hedging and risk management. The Fund may also use equity swap contracts and contracts for differences for these purposes. It is a policy of the Fund to stay fully invested in common stocks, index futures, equity swap contracts and contracts for differences even when the Manager believes that equity securities generally may underperform other types of investments. The Fund expects that, not including the margin deposits or the segregated accounts created in connection with index futures and other derivatives, less than 5% of its total net assets will be invested in high quality money market instruments such as securities issued by the U.S. government and agencies thereof, bankers' acceptances, commercial paper, and bank certificates of deposit. The Fund will at all times invest at least 65% of its total assets in domestic common stocks. The Fund does not expect to invest in long or short-term fixed income securities for temporary defensive purposes. For a detailed description of the investment practices described in the three preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices". CORE II SECONDARIES FUND The investment objective of the Core II Secondaries Fund is long-term growth of capital. Current income is only an incidental consideration. The Core II Secondaries Fund attempts to achieve its objective by selecting its investments from domestic second tier companies. For these purposes, "second tier companies" are those companies whose equity capitalization at the time of investment by the Core II Secondaries Fund ranks in the lower two-thirds of the 1800 publicly-held issuers with the largest equity capitalization. The Core II Secondaries Fund invests primarily in common stocks, although the Fund may on rare occasions hold securities convertible into common stocks such as convertible bonds, convertible preferred stocks and warrants. The Fund expects that at least 65% of its assets will be invested in the securities of second tier companies, as defined above. The Fund may also hold the common stocks (and securities convertible into common stocks) of companies with smaller equity capitalizations. Such investments may be less liquid, as the securities may not be listed on a national securities exchange and their market prices may be more volatile than those issued by companies with larger equity capitalizations. In pursuing its objective, the Fund may invest in securities of foreign issuers traded principally on U.S. securities exchanges, invest without limit in depository receipts of foreign issuers, and purchase convertible securities. The Fund may also invest up to 15% of its net assets in illiquid securities, lend portfolio securities valued at up to one-third of total assets, and enter into repurchase agreements. In addition, the Fund may purchase index futures on the S&P 500 and other domestic indices for investment, anticipatory hedging and risk management and to effect synthetic sales and purchases. The Fund may also buy exchange traded or over-the-counter put and call options, sell (write) covered options and enter into futures contracts for hedging and risk management. The Fund may also use equity swap contracts and contracts for differences for these purposes. It is a policy of the Fund to stay fully invested in common stocks, index futures, equity swap contracts and contracts for differences even when the Manager believes that equity securities generally may underperform other types of investments. The Fund expects that, not including the margin deposits or the segregated accounts created in connection with index futures and other derivatives, less than 5% of its total net assets will be invested in high quality money market instruments such as securities issued by the U.S. government and agencies thereof, bankers' acceptances, commercial paper, and bank certificates of deposit. The Fund will at all times invest at least 65% of its total assets in domestic common stocks. The Fund does not expect to invest in long or short-term fixed income securities for temporary defensive purposes. For a detailed description of the investment practices described in the three preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices". FUNDAMENTAL VALUE FUND The Fundamental Value Fund seeks long-term capital growth through investment primarily in equity securities. Current income is only a secondary consideration. It is anticipated that at least 90% of the Fund's assets will be invested in common stocks and securities convertible into common stocks. Although the Fund invests primarily in securities traded in the United States, it may invest up to 25% of its assets in securities of foreign issuers and securities traded principally outside of the United States. The Fund invests primarily in common stocks of domestic corporations that, in the opinion of the Manager, represent favorable values relative to their market prices. Under normal conditions, the Fund generally, but not exclusively, looks for companies with low price/earnings ratios and rising earnings. The Fund focuses on established firms with capitalizations of more than $100 million and generally does not buy issues of companies with less than three years of operating history. The Fund seeks to maintain lower than average equity risk levels relative to the potential for return through a portfolio with an average historic volatility (beta) below 1.0. The S&P 500, which serves as a standard for measuring volatility, always has average volatility (beta) of 1.0. The Fund's beta may change with market conditions. The Fund's Manager analyzes key economic variables to identify general trends in the stock markets. World economic indicators, which are tracked regularly, include U.S. industry and trade indicators, interest rates, international stock market indices, and currency levels. Under normal conditions, investments are made in a variety of economic sectors, industry segments, and individual securities to reduce the effects of price volatility in any one area. In making investments, the Manager takes into account, among other things, a company's source of earnings, competitive edge, management strength, and level of industry dominance as measured by market share. At the same time, the Manager analyzes the financial condition of each company. The Manager examines current and historical measures of relative value to find corporations that are selling at discounts relative to both underlying asset values and market pricing. The Manager then selects those companies with financial and business characteristics that it believes will produce above-average growth in earnings. Sell decisions are triggered when, in the opinion of the Manager, the stock price and other fundamental considerations make further appreciation less likely. The Manager generally selects equities that normally trade in sufficient volume to provide liquidity. Domestic equities are usually traded on the New York Stock Exchange or the American Stock Exchange or in the over-the-counter markets. The Fund's investments in foreign securities will generally consist of equity securities traded in principal European and Pacific Basin markets. The Manager evaluates the economic strength of a country, which includes its resources, markets, and growth rate. In addition, it examines the political climate of a country as to its stability and business policies. The Manager then assesses the strength of the country's currency and considers foreign exchange issues in general. The Fund aims for diversification not only among countries but also among industries in order to enable shareholders to participate in markets that do not necessarily move in concert with U.S. markets. Once the Fund has identified a rapidly expanding foreign economy, the Fund attempts to search out growing industries and corporations, focusing on companies with established records. Individual securities are selected based on value indicators, such as low price to earnings ratio. Foreign securities in the portfolio are generally listed on principal overseas exchanges. In pursuing its objective, the Fund may invest without limit in depository receipts of foreign issuers, and purchase convertible securities. The Fund may also invest up to 15% of its net assets in illiquid securities, lend portfolio securities valued at up to one-third of total assets, and enter into repurchase agreements. In addition, the Fund may purchase index futures on the S&P 500 and other domestic indices for investment, anticipatory hedging and risk management and to effect synthetic sales and purchases. The Fund may also buy exchange traded or over-the-counter put and call options, sell (write) covered options and enter into futures contracts and options on futures contracts for hedging and risk management. The Fund may also use equity swap contracts and contracts for differences for these purposes. It is a policy of the Fund to stay fully invested in common stocks, index futures, equity swap contracts and contracts for differences even when the Manager believes that equity securities generally may underperform other types of investments. The Fund expects that, not including the margin deposits or the segregated accounts created in connection with index futures and other derivatives, less than 5% of its total net assets will be invested in high quality money market instruments such as securities issued by the U.S. government and agencies thereof, bankers' acceptances, commercial paper, and bank certificates of deposit. The Fund will at all times invest at least 65% of its total assets in domestic common stocks. The Fund does not expect to invest in long or short-term fixed income securities for temporary defensive purposes. For a detailed description of the investment practices described in the preceding five paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices." INTERNATIONAL EQUITY FUNDS INTERNATIONAL CORE FUND The investment objective of the International Core Fund is to maximize total return through investment in a portfolio of common stocks of non-U.S. issuers. The Fund will usually invest primarily in common stocks, including dividend-paying common stocks. Capital appreciation may be sought through investment in common stocks, convertible bonds, convertible preferred stocks, warrants or rights. Income may be sought through investment in dividend-paying common stocks, convertible bonds, money market instruments or fixed income securities such as long and medium term corporate and government bonds and preferred stocks. Some of these fixed income securities may have speculative qualities and the values of these securities generally fluctuate more than those of other, less speculative fixed income securities. See "Descriptions and Risks of Fund Investment Practices -- Lower Rated Securities." The relative emphasis of the Fund on capital appreciation or income will depend upon the views of the Manager with respect to the opportunities for capital appreciation relative to the opportunities for income. There are no prescribed limits on geographic asset distribution and the Fund has the authority to invest in securities traded in securities markets of any country in the world, although under normal market conditions the Fund will invest in securities traded in the securities markets of at least three foreign countries. The responsibility for allocating the Fund's assets among the various securities markets of the world is borne by the Manager. In making these allocations, the Manager will consider such factors as the condition and growth potential of the various economic and securities markets, currency and taxation considerations and other pertinent financial, social, national and political factors. The Fund generally will not invest in securities of U.S. issuers, except that for temporary defensive purposes the Fund may invest up to 100 percent of its assets in United States securities. The Fund may use forward foreign currency contracts, currency futures contracts, currency swap contracts, options on currencies and buy and sell foreign currencies for hedging and for currency risk management, although the Fund's foreign currency exposure will not generally vary by more than 30% from the foreign currency exposure of a benchmark index (the "EAFE-lite Index"), which is a modification of the Morgan Stanley Capital International EAFE Index (the "EAFE Index") developed by the Manager so as to reduce the weighting of Japan in the EAFE Index. The put and call options on currency futures written by the Fund will always be covered. For more information on foreign currency transactions, see "Descriptions and Risks of Fund Investment Practices -- Foreign Currency Transactions." The stocks held by the Fund will not be chosen to approximate the weightings of the EAFE-lite Index. The Fund may also invest in securities of investment companies, such as closed-end investment management companies which invest in foreign markets or other of the International Equity Funds to the extent permitted under the Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder (the "1940 Act"). As a shareholder of an investment company, the Fund may indirectly bear service fees which are in addition to the fees the Fund pays its service providers. In addition, the Fund may invest in securities of foreign issuers traded on U.S. exchanges and securities traded abroad, American Depositary Receipts, European Depository Receipts and other similar securities convertible into securities of foreign issuers. The Fund may also enter repurchase agreements, lend portfolio securities valued at up to 25% of total assets, and may invest up to 15% of its net assets in illiquid securities. The Fund expects that, not including the margin deposits or the segregated accounts created in connection with index futures and other derivatives, less than 5% of its total net assets will be invested in cash or high quality money market instruments such as securities issued by the U.S. government and agencies thereof, bankers' acceptances, commercial paper, and bank certificates of deposit. The Fund may also buy put and call options, sell (write) covered options and enter into futures contracts and options on futures contracts for hedging and risk management. The Fund's use of options on particular securities (as opposed to market indices) is limited such that the premiums paid by the Fund on all outstanding options it has purchased may not exceed 5% of its total assets. The Fund may also write options in connection with buy-and- write transactions, and use index futures (on foreign stock indices), options on futures, equity swap contracts and contracts for differences for investment, anticipatory hedging and risk management and to effect synthetic sales and purchases. For a detailed description of the investment practices described in the four preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices." CURRENCY HEDGED INTERNATIONAL CORE FUND The investment objective of the Currency Hedged International Core Fund is to maximize total return through investment in a portfolio of common stocks of non-U.S. issuers and through management of the Fund's currency positions. The Fund has policies that are similar to the International Core Fund, except that the Currency Hedged International Core Fund will employ a different strategy with respect to foreign currency exposure. While the International Core Fund's foreign currency exposure will not generally differ from that of the EAFE-lite Index by more than 30%, the Currency Hedged International Core Fund's foreign currency exposure will generally vary no more than 30% from the currency exposure of a fully hedged EAFE-lite Index. That is, the Currency Hedged International Core Fund will hedge a substantial portion (generally at least 70%) of the EAFE-lite foreign currency exposure while the International Core Fund will generally hedge only a limited portion (generally less than 30%) of EAFE-lite currency exposure. The Currency Hedged International Core Fund may use forward foreign currency contracts, currency futures contracts, currency swap contracts, options on currencies and buy and sell foreign currencies for hedging and for currency risk management. The put and call options on currency futures written by the Fund will always be covered. For more information on foreign currency transactions, see "Descriptions and Risks of Fund Investment Practices - -- Foreign Currency Transactions." Because of its name, the Currency Hedged International Core Fund is required to have a policy that it will maintain short currency positions with respect to at least 65% of the foreign currency exposure represented by the common stocks owned by the Fund. The Fund will usually invest primarily in common stocks, including dividend-paying common stocks. The stocks held by the Fund will not be chosen to approximate the weightings of the EAFE-lite Index. Capital appreciation may be sought through investment in common stocks, convertible bonds, convertible preferred stocks, warrants or rights. Income may be sought through investment in dividend-paying common stocks, convertible bonds, money market instruments or fixed income securities such as long and medium term corporate and government bonds and preferred stocks. Some of these fixed income securities may have speculative qualities and the values of these securities generally fluctuate more than those of other, less speculative fixed income securities. See "Descriptions and Risks of Fund Investment Practices -- Lower Rated Securities." The relative emphasis of the Fund on capital appreciation or income will depend upon the views of the Manager with respect to the opportunities for capital appreciation relative to the opportunities for income. There are no prescribed limits on geographic asset distribution and the Fund has the authority to invest in securities traded in securities markets of any country in the world, although under normal market conditions the Fund will invest in securities traded in the securities markets of at least three foreign countries. The responsibility for allocating the Fund's assets among the various securities markets of the world is borne by the Manager. In making these allocations, the Manager will consider such factors as the condition and growth potential of the various economic and securities markets, currency and taxation considerations and other pertinent financial, social, national and political factors. The Fund generally will not invest in securities of U.S. issuers, except that for temporary defensive purposes the Fund may invest up to 100 percent of its assets in United States securities. The Fund may also invest in securities of investment companies, such as closed-end investment management companies which invest in foreign markets or other of the International Equity Funds to the extent permitted under the 1940 Act. As a shareholder of an investment company, the Fund may indirectly bear service fees which are in addition to the fees the Fund pays its service providers. In addition, the Fund may invest in securities of foreign issuers traded on U.S. exchanges and securities traded abroad, American Depositary Receipts, European Depository Receipts and other similar securities convertible into securities of foreign issuers. The Fund may also enter repurchase agreements, and lend portfolio securities valued at up to 25% of total assets. The Fund may also invest up to 15% of its net assets in illiquid securities and temporarily invest in cash and high quality money market instruments such as securities issued by the U.S. government and agencies thereof, bankers' acceptances, commercial paper, and bank certificates of deposit. The Fund expects that, not including the margin deposits or the segregated accounts created in connection with index futures and other derivatives, less than 5% of its total net assets will be invested in such high quality cash items. The Fund may also buy put and call options, sell (write) covered options and enter into futures contracts and options on futures contracts for hedging and risk management. The Fund's use of options on particular securities (as opposed to market indices) is limited such that the premiums paid by the Fund on all outstanding options it has purchased may not exceed 5% of its total assets. The Fund may also write options in connection with buy-and- write transactions, and use index futures (on foreign stock indices), options on futures, equity swap contracts and contracts for differences for investment, anticipatory hedging and risk management and to effect synthetic sales and purchases. For a detailed description of the investment practices described in the three preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices." FOREIGN FUND The investment objective of the Foreign Fund is to maximize total return through investment primarily in equity securities of non-U.S. issuers. The Fund's investment strategy is based on a fundamental analysis of issuers and country economics. The Fund will usually invest primarily in common stocks, including dividend-paying common stocks. Capital appreciation may be sought through investment in common stocks, convertible bonds, convertible preferred stocks, warrants or rights. Income may be sought through investment in dividend-paying common stocks, convertible bonds, money market instruments or fixed income securities such as long and medium term corporate and government bonds and preferred stocks. Some of these fixed income securities may have speculative qualities and the values of these securities generally fluctuate more than those of other, less speculative fixed income securities. See "Descriptions and Risks of Fund Investment Practices -- Lower Rated Securities". The relative emphasis of the Fund on capital appreciation or income will depend upon the views of the Manager with respect to the opportunities for capital appreciation relative to the opportunities for income. There are no prescribed limits on geographic asset distribution and the Fund has the authoritiy to invest in securities traded in securities markets of any country in the world other than the United States, although under normal market conditions the Fund will invest in securities principally traded in the securities markets of at least three countries. The responsibility for allocating the Fund's assets among the various securities markets of the world is borne by the Manager. In making these allocations, the Manager will consider such factors as the condition and growth potential of the various economic and securities markets, currency and taxation considerations and other pertinent financial, social, national and political factors. The Fund may use forward foreign currency contracts, currency futures contracts, options on currencies and buy and sell foreign currencies for the purpose of hedging the currency exposure of its portfolio securities. The Fund is not required to hedge its currency risk and will not normally hedge more than 90% of such risks. The Fund may also invest in securities of investment companies, such as closed-end investment management companies which invest in foreign markets or other of the International Equity Funds to the extent permitted under the Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder (the "1940 Act"). As a shareholder of an investment company, the Fund may indirectly bear service fees which are in addition to the fees the Fund pays its service providers. In addition, the Fund may invest in securities of foreign issuers traded on U.S. exchanges and securities traded abroad, American Depositary Receipts, European Depository Receipts and other similar securities convertible into securities of foreign issuers. The Fund may also enter into repurchase agreements, lend portfolio securities valued at up to one-third of total assets, and may invest up to 15% of its net assets in illiquid securities. The Fund may invest up to 20% of its assets in securities of issuers in newly industrialized countries of the type invested in by the Emerging Markets Fund. The Fund may also buy put and call options, sell (write) covered options and enter into futures contracts and options on futures contracts for hedging and risk management. The Fund's use of options on particular securities (as opposed to market indices) is limited such that the premiums paid by the Fund on all outstanding options it has purchased may not exceed 5% of its total assets. The Fund may also write options in connection with buy-and-write transactions and use index futures (on foreign stock). For a detailed description of the investment practices described in the four preceding paragraphs and the risks associated with the, see "Descriptions and Risks of Fund Investment Practices." INTERNATIONAL SMALL COMPANIES FUND The International Small Companies Fund seeks to maximize total return through investment primarily in equity securities of foreign issuers whose equity securities are traded on a major stock exchange of a foreign country ("foreign stock exchange companies") and whose equity capitalization at the time of investment, when aggregated with the equity capitalizations of all foreign stock exchange companies in that country whose equity capitalizations are smaller than that of such company, is less than 50% of the aggregate equity capitalization of all foreign stock exchange companies in such country ("small capitalization foreign companies"). With the exception of the International Small Companies Fund's policy of investing in securities of small capitalization foreign companies, and except as otherwise disclosed in this Prospectus and the related Statement of Additional Information, the International Small Companies Fund's investment objectives and policies are the same as those described above with respect to the International Core Fund. It is currently expected that at least 65% of the International Small Companies Fund's assets will be invested in common stocks of small capitalization foreign companies. Such companies may present greater opportunities for capital appreciation because of high potential earnings growth, but may also involve greater risk. Small capitalization foreign companies tend to be smaller and newer than other foreign companies and may be dependent upon a single proprietary product or market niche. They may have limited product lines, markets or financial resources, or may depend on a limited management group. Typically, small capitalization foreign companies have fewer securities outstanding and are less liquid than large companies. Their common stock and other securities may trade less frequently and in limited volume. The securities of small capitalization foreign companies are generally more sensitive to purchase and sale transactions and, therefore, the prices of such securities tend to be more volatile than the securities of larger companies. The Fund also may invest in securities of foreign issuers traded on U.S. exchanges and securities traded abroad, American Depositary Receipts, European Depository Receipts and other similar securities convertible into securities of foreign issuers. The Fund may also enter repurchase agreements, and lend portfolio securities valued at up to one-third of total assets. The Fund may also invest up to 15% of its net assets in illiquid securities and temporarily invest in cash and high quality money market instruments such as securities issued by the U.S. government and agencies thereof, bankers' acceptances, commercial paper, and bank certificates of deposit. The Fund expects that, not including the margin deposits or the segregated accounts created in connection with index futures and other derivatives, less than 5% of its total net assets will be invested in such high quality cash items. The Fund may also buy put and call options, sell (write) covered options and enter into futures contracts and options on futures contracts for hedging and risk management. The Fund's use of options on particular securities (as opposed to market indices) is limited such that the premiums paid by the Fund on all outstanding options it has purchased may not exceed 5% of its total assets. The Fund may also write options in connection with buy-and- write transactions, and use index futures (on foreign stock indices), options on futures, equity swap contracts and contracts for differences for investment, anticipatory hedging and risk management and to effect synthetic sales and purchases. The Fund may use forward foreign currency contracts, currency futures contracts, currency swap contracts, options on currencies and buy and sell foreign currencies for hedging and for currency risk management. The put and call options on currency futures written by the Fund will always be covered. For a detailed description of the investment practices described in the three preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices." JAPAN FUND The Japan Fund seeks to maximize total return through investment in a portfolio of Japanese securities, consisting primarily of common stocks of Japanese companies. It is currently expected that the Japan Fund will invest at least 90% of its assets in "Japanese Securities," that is, securities issued by entities that are organized under the laws of Japan and that either have 50% or more of their assets in Japan or derive 50% or more of their revenues from Japan ("Japanese Companies"). Although the Japan Fund will invest primarily in common stocks of Japanese Companies, it may also invest in other Japanese Securities, such as convertible preferred stock, warrants or rights as well as short-term government debt securities or other short-term prime obligations (i.e., high quality debt obligations maturing not more than one year from the date of issuance). The Japan Fund expects that any income it derives will be from dividend or interest payments on securities. Unlike mutual funds which invest in the securities of many other countries, the Japan Fund will be invested almost exclusively in Japanese Securities. No effort will be made by the Manager to assess the Japanese economic, political or regulatory developments or changes in currency exchange rates for purposes of varying the portion of the Fund's assets invested in Japanese Securities. This means that the Fund's performance will be directly affected by political, economic, market and exchange rate conditions in Japan. Also, since the Japanese economy is dependent to a significant extent on foreign trade, the relationships between Japan and its trading partners and between the yen and other currencies are expected to have a significant impact on particular Japanese Companies and on the Japanese economy generally. Also, the Japan Fund's investments are denominated in yen, whose value continually changes in relation to the dollar. This varying relationship will also directly affect the value of the Japan Fund's shares. The Japan Fund is designed for investors who are willing to accept the risks associated with changes in such conditions and relationships. To achieve its objectives, the Fund may invest in securities of foreign issuers traded on U.S. exchanges and securities traded abroad, American Depositary Receipts, European Depositary Receipts and other similar securities convertible into securities of foreign issuers. The Fund may also enter repurchase agreements, and lend portfolio securities valued at up to one-third of total assets. The Fund may also invest up to 15% of its net assets in illiquid securities and temporarily invest in cash and high quality money market instruments such as securities issued by the U.S. government and agencies thereof, bankers' acceptances, commercial paper, and bank certificates of deposit. The Fund expects that, not including the margin deposits or the segregated accounts created in connection with index futures or other derivatives, less than 5% of its total net assets will be invested in such high quality cash items. The Fund may also buy put and call options, sell (write) covered options and enter into futures contracts and options on futures contracts for hedging and risk management. The Fund's use of options on particular securities (as opposed to market indices) is limited such that the premiums paid by the Fund on all outstanding options it has purchased may not exceed 5% of its total assets. The Fund may also write options in connection with buy-and-write transactions, and use index futures (on foreign stock indices), options on futures, equity swap contracts and contracts for differences for investment, anticipatory hedging and risk management and to effect synthetic sales and purchases. The Fund may use forward foreign currency contracts, currency futures contracts, currency swap contracts, options on currencies and buy and sell foreign currencies for hedging and for currency risk management. The put and call options on currency futures written by the Fund will always be covered. For a detailed description of the investment practices described in the three preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices." EMERGING MARKETS FUND The Emerging Markets Fund seeks long-term capital appreciation consistent with what the Manager believes to be a prudent level of risk through investment in equity and equity-related securities traded in the securities markets of newly industrializing countries in Asia, Latin America, the Middle East, Southern Europe, Eastern Europe and Africa. The Manager has appointed Dancing Elephant, Ltd. to serve as a consultant (the "Consultant") to the Fund. The Consultant's efforts focus on asset allocation among the selected emerging markets. (See "Descriptions and Risks of Fund Investment Practices -- Certain Risks of Foreign Investments.") In addition to considerations relating to a particular market's investment restrictions and tax barriers, this asset allocation is based on certain other relevant factors including the outlook for economic growth, currency exchange rates, commodity prices, interest rates, political factors and the stage of the local market cycle in such emerging market. The Consultant expects to allocate the Fund's investments over geographic as well as economic sectors. There are currently over 50 newly industrializing and developing countries with equity markets. A number of these markets are not yet easily accessible to foreign investors and have unattractive tax barriers or insufficient liquidity to make significant investments by the Fund feasible or attractive. However, many of the largest of the emerging markets have, in recent years, liberalized access and more are expected to do so over the coming few years if the present trend continues. Emerging markets in which the Fund intends to invest may include the following emerging markets ("Emerging Markets"): Asia: Bangladesh, China, India, Indonesia, Korea, Malaysia, Mynanmar, Mongolia, Pakistan, Philippines, Sri Lanka, Republic of China (Taiwan), Thailand, Vietnam Latin America: Argentina, Bolivia, Brazil, Chile, Columbia, Costa Rica, Ecuador, Jamaica, Mexico, Peru, Uruguay, Venezuela, Europe/ Middle East/ Africa: Botswana, Czech Republic, Ghana, Greece, Hungary, Israel, Jordan, Kazakhstan, Kenya, Morocco, Namibia, Nigeria, Poland, Portugal, Russia, Slovakia, Slovenia, South Africa, Turkey, Ukraine, Zimbabwe The Emerging Markets Fund has a fundamental policy that, under normal conditions, at least 65% of its total assets will be invested in equity and equity-related securities which are predominantly traded on Emerging Market exchanges ("Emerging Market Securities"). The Fund invests predominantly in individual stocks listed on Emerging Market stock exchanges or in depository receipts of such stocks listed on markets in industrialized countries or traded in the international equity market. The Fund may also invest in shares of companies which are not presently listed but are in the process of being privatized by the government and, subject to a maximum aggregate investment equal to 25% of the total assets of the Fund, shares of companies that are traded in unregulated over-the-counter markets or other types of unlisted securities mar kets. The Fund may also invest through investment funds, pooled accounts or other investment vehicles designed to permit investments in a portfolio of stocks listed in a particular developing country or region subject to obtaining any necessary local regulatory approvals, particularly in the case of countries in which such an investment vehicle is the exclusive or main vehicle for foreign portfolio investment. Such investments may result in additional costs, as the Fund may be required to bear a pro rata share of the expenses of each such fund in which it invests. The Fund may also invest in companies listed on major markets outside of the emerging markets that, based on information obtained by the Consultant, derive at least half of their revenues from trade with or production in developing countries. In addition, the Fund's assets may be invested on a temporary basis in debt securities issued by companies or governments in developing countries or money market securities of high-grade issuers in industrialized countries denominated in various currencies. The Fund may also invest in bonds and money market instruments in Canada, the United States and other markets of industrialized nations and emerging securities markets, and, for temporary defensive purposes, may invest without limit in cash and high quality money market instruments such as securities issued by the U.S. government and agencies thereof, bankers' acceptances, commercial paper, and bank certificates of deposit. The Fund expects that, not including the margin deposits or the segregated accounts created in connection with index futures and other derivatives, less than 5% of its total net assets will be invested in such high quality cash items. The Fund may also invest in indexed securities, the redemption value and/or coupons of which are indexed to the prices of other securities, securities indices, currencies, precious metal, or other commodities, as well as other technical indicators. The Fund may also invest up to 10% of its total assets through debt-equity conversion funds established to exchange foreign bank debt of countries whose principal repayments are in arrears into a portfolio of listed and unlisted equities, subject to certain repatriation restrictions. The Fund may also invest in convertible securities, enter repurchase agreements and lend portfolio securities valued at up to one-third of total assets. The Fund may invest up to 15% of its net assets in illiquid securities. The Fund may also buy put and call options, sell (write) covered options and enter into futures contracts and options on futures contracts for hedging and risk management. The Fund's use of options on particular securities (as opposed to market indices) is limited such that the premiums paid by the Fund on all outstanding options it has purchased may not exceed 5% of its total assets. The Fund may also write options in connection with buy-and-write transactions, and use index futures (on foreign stock indices), options on futures, equity swap contracts and contracts for differences for investment, anticipatory hedging and risk management and to effect synthetic sales and purchases. The Fund may use forward foreign currency contracts, currency futures contracts, currency swap contracts, options on currencies and buy and sell foreign currencies for hedging and for currency risk management. The put and call options on currency futures written by the Fund will always be covered. For a detailed description of the investment practices described in the five preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices." GLOBAL HEDGED EQUITY FUND The Global Hedged Equity Fund seeks total return consistent with minimal exposure to general equity market risk. The Fund will pursue its investment objective by investing substantially all of its assets in a combination of (i) equity securities, (ii) derivative instruments intended to hedge the value of the Fund's equity securities against substantially all of the general movements in the relevant equity market(s), including hedges against substantially all of the changes in the value of the U.S. dollar relative to the currencies represented in the indices used to hedge general equity market risk and (iii) long interest rate futures contracts intended to adjust the duration of the theoretical fixed income security embedded in the pricing of the derivatives used for hedging the Fund's equity securities (the "Theoretical Fixed Income Security"). The Fund may also buy exchange traded or over-the-counter put and call options and sell (write) covered options for hedging or investment. To the extent that the Fund's portfolio strategy is successful, the Fund is expected to achieve a total return consisting of (i) the performance of the Fund's equity securities, relative to the relevant equity market indices (including appreciation or depreciation of any overweighted currency relative to the currency weighting of the equity hedge), plus or minus (ii) short-term capital gains or losses approximately equal to the total return on the Theoretical Fixed Income Security, plus or minus (iii) capital gains or losses on the Fund's interest rate futures positions minus (iv) transaction costs and other Fund expenses. Investors should understand that, as opposed to conventional equity portfolios, to the extent that the Fund's hedging positions are effective, the performance of the Fund is not expected to correlate with the movements of equity markets generally. Rather, the performance of the Fund will tend to be a function of the total return on fixed income securities and the performance of the Fund's equity securities relative to broad market indices, including changes in overweighted currencies relative to the currency weighting of those indices. The Global Hedged Equity Fund has a fundamental policy that, under normal market conditions, at least 65% of its total assets will be invested in equity securities. In addition, under normal market conditions, the Fund will invest in securities principally traded in the securities markets of at least three countries. The Global Hedged Equity Fund will generally invest in at least 125 different common stocks chosen from among (i) the Large Cap 1200 and (ii) stocks traded primarily outside of the United States similarly chosen from among issuers with the largest market capitalization that are principally traded on a given foreign securities exchange. The Fund may invest up to 20% of its assets in securities of issuers in newly industrializing countries of the type invested in by the Emerging Markets Fund. The Manager will select which common stocks to purchase based on its assessment of whether the common stock of an issuer (and/or the currency in which the stock is traded) is likely to perform better than the broad global equity market index (the "Selected Equity Index") selected by the Manager to serve as a hedge for the Fund's portfolio as a whole. As indicated above, the Fund will seek to hedge fully the value of its equity holdings (measured in U.S. dollars) against substantially all movements in the global equity markets (measured in U.S. dollars). This means that, if the hedging strategy is successful, when the world equity markets and/or the U.S. dollar go up or down, the Fund's net asset value will not be materially affected by those movements in the relevant equity or currency markets generally, but will rise or fall based primarily on whether the Fund's selected equity securities perform better or worse than the Selected Equity Index. Those changes will include the changes in any overweighted currency relative to the currency weighting of the Selected Equity Index. The Fund may use a variety of equity hedging instruments. It is currently anticipated that the Fund will primarily use a combination of short equity swap contracts and Index Futures for the purpose of hedging equity market exposure, including, to the extent permitted by regulations of the Commodity Futures Trading Commission, those traded on foreign markets. Derivative short positions represented by the Fund's equity swap contracts will generally relate to modified versions of the market capitalization weighted U.S., Europe, Australia and Far East Index (or "Global Index") calculated by Morgan Stanley Capital International. These modified indices ("Modified Global Index") generally reduce the size of the Japanese equity markets for purposes of the country weighting by 40% or more. The Fund generally expects to build its currency hedging into its equity swap contracts, although it may also attempt to hedge directly its foreign currency-denominated portfolio securities against an appreciation in the U.S. dollar relative to the foreign currencies in which such securities are denominated. The Manager expects to select specific equity investments without regard to the country weightings of the Modified Global Index and in some cases may intentionally emphasize holdings in a particular market or traded in a particular currency. Because the country market and currency weighting of the Modified Global Index will generally not precisely mirror the country market weightings represented by the Fund's equity securities, there will be an imperfect correlation between the Fund's equity securities and the hedging position(s). Consequently, the Fund's hedging strategies using those equity swap contracts are expected to be somewhat imperfect. This means there is a risk that if the Fund's equity securities decline in value as a result of general market conditions, the hedging position(s) may not appreciate enough to offset that decline (or may actually depreciate). Likewise, if the Fund's equity securities increase in value, that value may be more than offset by a decline in the value of the hedging position(s). Also, because the Manager may conclude that a particular currency is likely to appreciate relative to the currencies represented by the Selected Equity Index, securities traded in that particular currency may be overweighted relative to the Selected Equity Index. Such an overweighted position may result in a loss or reduced gain to the Fund (even when the security appreciates in local currency) if the relevant currency depreciates relative to the currencies represented by the Modified Global Index. The Fund's hedging positions are also expected to increase or decrease the Fund's gross total return by an amount approximating the total return on relevant short-term fixed income securities referred to above as the Theoretical Fixed Income Security. For example, as the holder of a short derivative position on an equity index, the Fund will be obligated to pay the holder of the long position (the "counterparty") the total return on that equity index. The Fund's contractual obligation eliminates for the counterparty the opportunity cost that would be associated with actually owning the securities underlying that equity index. That opportunity cost would generally be considered the total return that a counterparty could achieve if the counterparty's capital were invested in a short-term fixed income security (i.e., up to 2 years maturity) rather than in the securities underlying the Relevant Equity Index. Because the counterparty is relieved of this cost, the pricing of the hedging instruments is designed to compensate the holder of the short position (in this case the Fund) by paying to the holder the total return on the Theoretical Fixed Income Security. (Another way of thinking about this is that the holder of the short position must, in theory, be compensated for the cost of borrowing money over some relatively short term (generally up to 2 years) to purchase an equity portfolio matching that holder's obligations under the hedging instrument.) In practice, the Manager has represented that generally, if there is no movement in the Relevant Equity Index during the term of the derivative instrument, the Fund as the holder of the short (hedging) position would be able to close out that position with a gain or loss equal to the total return on a Theoretical Fixed Income Security with a principal amount equal to the face or notional amount of the hedging instrument. The total return on the Theoretical Fixed Income Security would be accrued interest plus or minus the capital gain or loss on that security. In the case of Index Futures, the Fund would expect the Theoretical Fixed Income Security would be one with a term equal to the remaining term of the Index Future and bearing interest at a rate approximately equal to the weighted average interest rate for money market obligations denominated in the currency or currencies used to settle the Index Futures (generally LIBOR if settled in U.S. dollars). In the case of equity swap contracts, the Manager can specify the Theoretical Fixed Income Security whose total return will be paid to (or payable by) the Fund. In cases where the Manager believes the implicit "duration" of the Fund's theoretical fixed income securities is too short to provide an acceptable total return, the Fund may enter into long interest rate futures (or purchase call options on longer maturity fixed-income securities) which, together with the Theoretical Fixed Income Security, creates a synthetic Theoretical Fixed Income Security with a longer duration (but never with a duration causing the Fund's overall duration to exceed that of 3-year U.S. Treasury obligations) (See "Descriptions and Risks of Fund Investment Practices -- Use of Options, Futures and Options on Futures -- Investment Purposes"). The Fund will segregate cash, U.S. Treasury obligations and other high grade debt obligations in an amount equal, on a marked-to-market basis, to the Fund's obligations under the interest rate futures. Duration is the average time until payment (or anticipated payment in the case of a callable security) of interest and principal on a fixed income security, weighted according to the present value of each payment. If interest rates rise, the Fund would expect that the value of any long interest rate future owned by the Fund would decline and that amounts payable to the Fund under an equity swap contract in respect of the Theoretical Fixed Income Security would decrease or that amounts payable by the Fund thereunder would increase. Any such decline (and/or the amount of any such decrease or increase under a short equity swap contract) could be greater than the derivative "interest" received on the Fund's Theoretical Fixed Income Securities. The Fund's gross return is also expected to be reduced by transaction costs and other Fund expenses. Those expenses will generally include currency hedging costs if interest rates outside the U.S. are higher than those in the U.S. For the equity swap contracts entered into by the Fund, the counterparty will typically be a bank, investment banking firm or broker/dealer. The counterparty will generally agree to pay the Fund (i) interest on the Theoretical Fixed Income Security with a principal amount equal to the notional amount of the equity swap contract plus (ii) the amount, if any, by which that notional amount would have decreased in value (measured in U.S. Dollars) had it been invested in the stocks comprising the equity index agreed to by the Fund (the "Contract Index") in proportion to the composition of the Contract Index. (The Contract Index will be the Modified Global Index except that, to the extent short futures contracts on a particular country's equity securities are also used by the Fund, the Contract Index may be the Modified Global Index with a reduced weighting for that country to reflect the futures position.) The Fund will agree to pay the counterparty (i) any negative total return on the Theoretical Fixed Income Security plus (ii) the amount, if any, by which the notional amount of the equity swap contract would have increased in value (measured in U.S. Dollars) had it been invested in the stocks comprising the Contract Index plus (iii) the dividends that would have been received on those stocks. Therefore, the return to the Fund on any equity swap contract should be the total return on the Theoretical Fixed Income Security reduced by the gain (or increased by the loss) on the notional amount as if invested in the Contract Index and reduced by the dividends on the stocks comprising the Contract Index. The Fund will only enter into equity swap contracts on a net basis, i.e., the two parties' obligations are netted out, with the Fund paying or receiving, as the case may be, only the net amount of any payments. Payments under the equity swap contracts may be made at the conclusion of the contract or periodically during its term. The Fund may from time to time enter into the opposite side of equity swap contracts (i.e., where the Fund is obligated to pay the decrease (or receive the increase) on the Contract Index increased by any negative total return (and decreased by any positive total return) on the Theoretical Fixed Income Security) to reduce the amount of the Fund's equity market hedging consistent with the Fund's objective. These positions are sometimes referred to as "long equity swap contracts." The Fund may also take long positions in index futures for similar purposes. The Fund may also take a long position in index futures to reduce the amount of the Fund's equity market hedging consistent with the Fund's objective. When hedging positions are reduced using index futures, the Fund will also be exposed to the risk of imperfect correlations between the index futures and the hedging positions being reduced. The Fund will use a combination of long and short equity swap contracts and long and short positions in index futures in an attempt to hedge generally its equity securities against substantially all movements in the relevant equity markets generally. The Fund will not use equity swap contracts or Relevant Equity Index Futures to leverage the Fund. The Fund's actual exposure to an equity market or markets will not be completely hedged if the aggregate of the notional amount of the long equity swap contracts (less the notional amount of any short equity swap contracts) relating to the relevant equity index plus the face amount of the short Index Futures (less the face amount of any long Index Futures) is less than the Fund's total net assets invested in common stocks principally traded on such market or markets and will tend to be overhedged if such aggregate is more than the Fund's total net assets so invested. Under normal conditions, the Manager expects the Fund's total net assets invested in equity securities generally to be up to 5% more or less than this aggregate because purchases and redemptions of Fund shares will change the Fund's total net assets frequently, because Index Futures can only be purchased in integral multiples of an equity index and because the Funds' positions may appreciate or depreciate over time. Also, the ability of the Fund to hedge risk may be diminished by imperfect correlations between price movements of the underlying equity index with the price movements of Index Futures relating to that index and by lack of correlation between the market weightings of the Modified Global Index, on the one hand, and, on the other, the market weightings represented by the common stocks selected for purchase by the Fund. In theory, the Fund will only be able to achieve its objective with precision if (i) the aggregate face amount of the net short Index Futures plus the notional amount of the long equity swap contracts (less the notional amount of any short equity swap contracts) relating to the Selected Equity Index is precisely equal to a Fund's total net assets, (ii) there is exact price movement correlation between any Index Futures and the relevant equity index, (iii) there is exact price correlation between the Modified Global Index and the overall movements of the relevant equity markets and (iv) the Fund's currency hedging strategies are effective. As noted, in practice there are a number of risks and cash flows which will tend to undercut these assumptions. The purchase and sale of common stocks and Index Futures involve transaction costs and reverse equity swap contracts require the Fund to pay interest on the notional amount of the contract. In addition to the practices described above, in order to pursue its objective the Fund may invest in securities of foreign issuers traded on U.S. exchanges and securities traded abroad, American Depositary Receipts, European Depositary Receipts and other similar securities convertible into securities of foreign issuers. The Fund may also invest up to 15% of its net assets in illiquid securities and temporarily invest up to 50% of its assets in cash and high quality money market instruments such as securities issued by the U.S. government and agencies thereof, bankers' acceptances, commercial paper, and bank certificates of deposit. The Fund may also enter repurchase agreements, and lend portfolio securities valued at up to one-third of total assets. In addition, for hedging purposes only the Fund may use forward foreign currency contracts, currency futures contracts, related options and options on currencies, and buy and sell foreign currencies. For a detailed description of the investment practices described in the three preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices" later in this Prospectus. FIXED INCOME FUNDS As used in several of the Fixed Income Funds' investment objectives below, "bond" means any fixed income obligation with an original maturity of two years or more, as well as "synthetic" bonds created by combining a futures contract or option on a fixed income security with cash, a cash equivalent investment or another fixed income security. (See "Descriptions and Risks of Fund Investment Practices -- Uses of Options, Futures and Options on Futures -- Investment Purposes".) Total return for each Fund will be measured by aggregating capital value changes and income. Under normal market conditions, each of the Emerging Country Debt Fund, the Core Emerging Country Debt Fund, the International Bond Fund, the Currency Hedged International Bond Fund and the Global Bond Fund will invest at least 65% of its assets in bonds of issuers of at least three countries (excluding the United States). However, up to 100% of these Fixed Income Fund's assets may be denominated in U.S. dollars, and for temporary defensive purposes, each such Fixed Income Fund may invest as much as 100% of its assets in issuers from one or two countries, which may include the United States. DOMESTIC BOND FUND The Domestic Bond Fund seeks to earn high total return through investment primarily in U.S. Government Securities. The Fund may also invest a significant portion of its assets in other investment grade bonds (including convertible bonds) denominated in U.S. dollars. The Fund's portfolio will generally have a duration of approximately four to six years (excluding short-term investments). The duration of a fixed income security is the weighted average maturity, expressed in years, of the present value of all future cash flows, including coupon payments and principal repayments. The Fund will attempt to provide a total return greater than that generally provided by the U.S. government securities market as measured by an index selected from time to time by the Manager. The Fund may invest in fixed income securities of any maturity, although the Fund expects that at least 65% of its total assets will be comprised of "bonds" (as such term is defined above) of U.S. issuers. Fixed income securities include securities issued by federal, state, local and foreign governments, and a wide range of private issuers. The Fund may lend portfolio securities valued at up to one-third of total assets, invest up to 5% of its assets in lower rated securities (also known as "junk bonds"), and invest in adjustable rate securities, zero coupon securities and depository receipts. The Fund may also enter into repurchase agreements, reverse repurchase agreements and dollar roll transactions. The Fund may also enter into loan participation agreements and invest in other direct debt instruments. In addition, the Fund may invest in mortgage-backed and other asset-backed securities issued by the U.S. government, its agencies and by non-government issuers, including collateral mortgage obligations ("CMO's"), strips and residuals. The Fund may also invest in indexed securities the redemption values and/or coupons of which are indexed to the prices of other securities, securities indices, currencies, precious metals or other commodities, or other financial indicators. The Fund may also enter into firm commitment agreements with banks or broker-dealers, and may invest up to 15% of its assets in illiquid securities. In addition, the Fund may buy put and call options, sell (write) covered options, and enter into futures contracts and options on futures contracts for hedging, investment and risk management and to effect synthetic sales and purchases. The Fund's use of options on particular securities (as opposed to market indices) is limited such that the premiums paid by the Fund on all outstanding options it has purchased may not exceed 5% of its total assets. The Fund may also use interest rate swap contracts, contracts for differences and interest rate caps, floors and collars for hedging, investment and risk management. For a detailed description of the investment practices described in the three preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices." SHORT-TERM INCOME FUND The Short-Term Income Fund seeks current income to the extent consistent with the preservation of capital and liquidity through investment in a portfolio of fixed income instruments rated high quality by Standard & Poor's Corporation ("S&P") or by Moody's Investors Service, Inc. ("Moody's") or considered by the Manager to be of comparable quality. While the Short-Term Income Fund intends to invest in short-term securities, it is not a money market fund. Debt securities held by the Fund which have a remaining maturity of 60 days or less will be valued at amortized cost unless circumstances dictate otherwise. See "Determination of Net Asset Value." It is the present policy of the Short-Term Income Fund, which may be changed without shareholder approval, to maintain at least 65% of the Fund's assets invested in securities with remaining maturities of two years or less. In determining whether a security is a suitable investment for the Short-Term Income Fund, reference will be made to the quality of the security, including its rating, at the time of purchase. The Manager may or may not dispose of a portfolio security as a result of a change in the securities' rating, depending on its evaluation of the security in light of the Fund's investment objectives and policies. The Fund may invest in prime commercial paper and master demand notes (rated "A-1" by S&P or "Prime-1" by Moody's or, if not rated, issued by companies having an outstanding debt issue rated at least "AA" by S&P or at least "Aa" by Moody's), high-quality corporate debt securities (rated at least "AA" by S&P or at least "Aa" by Moody's), and high-quality debt securities backed by pools of commercial or consumer finance loans (rated at least "AA" by S&P or "Aa" by Moody's) and certificates of deposit, bankers' acceptances and other bank obligations (when and if such other bank obligations become available in the future) issued by banks having total assets of at least $2 billion as of the date of the bank's most recently published financial statement. In addition to the foregoing, the Short-Term Income Fund may also invest in certificates of deposit of $100,000 or less of domestic banks and savings and loan associations, regardless of total assets, if the certificates of deposit are fully insured as to principal by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation. The Short-Term Income Fund may invest up to 100% of its assets in obligations issued by banks, and up to 15% of its assets in obligations issued by any one bank. If the bank is a domestic bank, it must be a member of the Federal Deposit Insurance Corporation. This does not prevent the Short-Term Income Fund from investing in obligations issued by foreign branches of domestic banks and there is currently no limit on the Fund's ability to invest in these obligations. If the bank is foreign, the obligation must, in the opinion of the Manager, be of a quality comparable to the other debt securities which may be purchased by the Short-Term Income Fund. There are special risks associated with investments in such foreign bank obligations, including the risks associated with foreign political, economic and legal developments and the fact that foreign banks may not be subject to the same or similar regulatory requirements that apply to domestic banks. (See "Descriptions and Risks of Fund Investment Practices - Certain Risks of Foreign Investments.") The Short-Term Income Fund will invest in these securities only when the Manager believes the risks are minimal. In addition, to the extent the Short-Term Income Fund concentrates its assets in the banking industry, including the domestic banking industry, adverse events affecting the industry may also have an adverse effect on the Fund. Such adverse events include, but are not limited to, rising interest rates which affect a bank's ability to maintain the "spread" between the cost of money and any fixed return earned on money, as well as industry-wide increases in loan default rates and declines in the value of loan collateral such as real estate. The Fund may also invest in U.S. Government Securities. The Short-Term Income Fund may purchase any of the foregoing instruments through firm commitment arrangements with domestic commercial banks and registered broker-dealers and may enter into repurchase agreements with such banks and broker-dealers with respect to any of the foregoing money market instruments, longer term U.S. Government Securities or corporate debt securities rated at least "AA" by S&P or at least "Aa" by Moody's. The Fund will only enter into firm commitment arrangements and repurchase agreements with banks and broker-dealers which the Manager determines present minimal credit risks. All of the Short-Term Income Fund's investments will, at the time of investment, have remaining maturities of five years or less and the average maturity of the Short-Term Income Fund's portfolio securities based on their dollar value will not exceed two years at the time of each investment. When the Fund has purchased a security subject to a repurchase agreement, the amount and maturity of the Fund's investment will be determined by reference to the amount and term of the repurchase agreement, not by reference to the underlying security. When the Fund purchases an adjustable rate security, the security's maturity will be determined with reference to the frequency with which the rate is adjusted. If the disposition of a portfolio security results in a dollar-weighted average portfolio maturity in excess of two years for the Fund, it will invest its available cash in such a manner as to reduce its dollar-weighted average maturity to two years or less as soon as reasonably practicable. The Fund may also invest in foreign securities when the Manager believes the risks are minimal, and lend portfolio securities valued at up to one-third of its total assets. For a detailed description of the investment practices described in the preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices." INTERNATIONAL BOND FUND The International Bond Fund seeks to earn high total return through investment primarily in investment-grade bonds (including convertible bonds) denominated in various currencies, including U.S. dollars, or in multicurrency units. The Fund will attempt to provide a total return greater than that generally provided by the international fixed income securities markets as measured by an index selected from time to time by the Manager. Because the Fund will not generally attempt to hedge against an appreciation in the U.S. dollar relative to the foreign currency in which its portfolio securities are denominated, investors should expect that the Fund's performance will be adversely affected by appreciation of the U.S. dollar and will be positively affected by a decline in the U.S. dollar relative to the currencies in which the Funds' portfolio securities are denominated. The Fund may invest in fixed income securities of any maturity, although the Fund expects that at least 65% of its total assets will be comprised of "bonds" as such term is defined above. Fixed income securities include securities issued by federal, state, local and foreign governments, and a wide range of private issuers. The Fund may enter into loan participation agreements and other direct investments, forward foreign exchange agreements, and purchase or sell securities on a when- issued or delayed delivery basis. The Fund may also invest a portion of its assets in sovereign debt (bonds, including convertible bonds and Brady bonds, and loans) of countries in Asia, Latin America, the Middle East, Southern Europe, Eastern Europe and Africa (see "Emerging Country Debt Fund") and, to the extent permitted by the 1940 Act, may invest in shares of the Emerging Country Debt Fund or the Core Emerging Country Debt Fund. The Fund may lend portfolio securities valued at up to one-third of total assets, invest up to 25% of its assets in lower rated securities (also known as "junk bonds"), and invest in adjustable rate securities, zero coupon securities and depositary receipts of foreign issuers. The Fund may also enter into repurchase agreements, reverse repurchase agreements and dollar roll agreements. In addition, the Fund may invest in mortgage-backed and other asset- backed securities issued by the U.S. government, its agencies and by non-government issuers, including collateral mortgage obligations ("CMO's"), strips and residuals. The Fund may also invest in indexed securities the redemption values and/or coupons of which are indexed to the prices of other securities, securities indices, currencies, precious metals or other commodities, or other financial indicators. The Fund may also enter into firm commitment agreements with banks or broker-dealers, and may invest up to 15% of its assets in illiquid securities. The Fund may buy put and call options, sell (write) covered options, and enter into futures contracts and options on futures contracts for hedging, investment and risk management and to effect synthetic sales and purchases. The Fund's use of options on particular securities (as opposed to market indices) is limited such that the premiums paid by the Fund on all outstanding options it has purchased may not exceed 10% of its total assets. The Fund may also write options in connection with buy- and-write transactions, and use index futures on foreign indices for investment, anticipatory hedging and risk management. In addition, the Fund may use forward foreign currency contracts, currency futures contracts and related options, currency swap contracts, options on currencies, and buy and sell currencies for hedging, and for currency risk management. The Fund may also use synthetic bonds and synthetic foreign currency denominated securities to approximate desired risk/return profiles where the desired profile is either unavailable or possesses undesirable characteristics. In addition, the Fund may use interest rate swap contracts, contracts for differences and interest rate caps, floors and collars for hedging, investment and risk management. For a detailed description of the investment practices described in the three preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices." CURRENCY HEDGED INTERNATIONAL BOND FUND The Currency Hedged International Bond Fund seeks to earn high total return through investment primarily in investment-grade bonds (including convertible bonds) denominated in various currencies including U.S. dollars or in multicurrency units. The Fund will attempt to provide a total return greater than that generally provided by the international fixed income securities markets as measured by an index selected from time to time by the Manager. The Fund has the same objectives and policies as the International Bond Fund, except that the Currency Hedged International Bond Fund will generally attempt to hedge at least 75% of its foreign currency-denominated portfolio securities against an appreciation in the U.S. dollar relative to the foreign currencies in which the portfolio securities are denominated. However, there can be no assurance that the Fund's hedging strategies will be totally effective. The Fund may invest in fixed income securities of any maturity, although the Fund expects that at least 65% of its total assets will be comprised of "bonds" as such term is defined above. Fixed income securities include securities issued by federal, state, local and foreign governments, and a wide range of private issuers. The Fund may enter into loan participation agreements and other direct investments, forward foreign exchange agreements and purchase or sell securities on a when-issued or delayed delivery basis. The Fund may also invest a portion of its assets in sovereign debt (bonds, including convertible bonds and Brady Bonds, and loans) of countries in Asia, Latin America, the Middle East, Southern Europe, Eastern Europe and Africa (see "Emerging Country Debt Fund") and, to the extent permitted by the 1940 Act, may invest in shares of the Emerging Country Debt Fund or the Core Emerging Country Debt Fund. The Fund may lend portfolio securities valued at up to one-third of total assets, invest up to 25% of its assets in lower rated securities (also known as "junk bonds"), and invest in adjustable rate securities, zero coupon securities and depositary receipts of foreign issuers. The Fund may also enter into repurchase agreements, reverse repurchase agreements and dollar roll agreements. In addition, the Fund may invest in mortgage-backed and other asset- backed securities issued by the U.S. government, its agencies and by non-government issuers, including collateral mortgage obligations ("CMO's"), strips and residuals. The Fund may also invest in indexed securities the redemption values and/or coupons of which are indexed to the prices of other securities, securities indices, currencies, precious metals or other commodities, or other financial indicators. The Fund may also enter into firm commitment agreements with banks or broker-dealers, and may invest up to 15% of its assets in illiquid securities. The Fund may buy put and call options, sell (write) covered options, and enter into futures contracts and options on futures contracts for hedging, investment and risk management and to effect synthetic sales and purchases. The Fund's use of options on particular securities (as opposed to market indices) is limited such that the premiums paid by the Fund on all outstanding options it has purchased may not exceed 10% of its total assets. The Fund may also write options in connection with buy- and-write transactions, and use index futures on foreign indices for investment, anticipatory hedging and risk management. In addition, the Fund may use forward foreign currency contracts, currency futures contracts and related options, currency swap contracts, options on currencies, and buy and sell currencies for hedging, and for currency risk management. The Fund may also use synthetic bonds and synthetic foreign currency denominated securities to approximate desired risk/return profiles where the desired profile is either unavailable or possesses undesirable characteristics. In addition, the Fund may use interest rate swap contracts, contracts for differences and interest rate caps, floors and collars for hedging, investment and risk management. For a detailed description of the investment practices described in the three preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices." GLOBAL BOND FUND The Global Bond Fund seeks to earn high total return through investment primarily in investment-grade bonds (including convertible bonds) denominated in various currencies, including U.S. dollars, or in multicurrency units. The Fund will attempt to provide a total return greater than that generally provided by the global fixed income securities markets as measured by an index selected from time to time by the Manager. The Fund will invest in fixed income securities of both United States and foreign issuers. Because the Fund will not generally attempt to hedge against an appreciation in the U.S. dollar relative to the foreign currencies in which some of its portfolio securities are denominated, investors should expect that the Fund's performance will be adversely affected by appreciation of the U.S. dollar and will be positively affected by a decline in the U.S. dollar relative to the currencies in which the Funds' portfolio securities are denominated. The Fund may invest in fixed income securities of any maturity, although the Fund expects that at least 65% of its total assets will be comprised of "bonds" as such term is defined above. Fixed income securities include securities issued by federal, state, local and foreign governments, and a wide range of private issuers. Under certain adverse investment conditions, the Fund may restrict the number of securities markets in which assets will be invested, although under normal market circumstances it is expected that the Fund's investments will involve securities principally traded in at least three different countries. For temporary defensive purposes, the Fund may invest up to 100% of its assets in securities principally traded in the United States and/or denominated in U.S. dollars. The Fund may enter into loan participation agreements and other direct investments, forward foreign exchange agreements, and purchase or sell securities on a when- issued or delayed delivery basis. The Fund may also invest a portion of its assets in sovereign debt (bonds, including convertible bonds and Brady bonds, and loans) of countries in Asia, Latin America, the Middle East, Southern Europe, Eastern Europe and Africa (See "Emerging Country Debt Fund") and, to the extent permitted by the 1940 Act, may invest in shares of the Emerging Country Debt Fund, the Core Emerging Country Debt Fund, the Domestic Bond Fund and/or the International Bond Fund. The Fund may lend portfolio securities valued at up to one-third of total assets, invest up to 25% of its assets in lower rated securities (also known as "junk bonds"), and invest in adjustable rate securities, zero coupon securities and depository receipts of foreign issuers. The Fund may also enter into repurchase agreements, reverse repurchase agreements and dollar roll transactions. In addition, the Fund may invest in mortgage-backed and other asset- backed securities issued by the U.S. government, its agencies and by non-government issuers, including collateral mortgage obligations ("CMO's"), strips and residuals. The Fund may also invest in indexed securities the redemption values and/or coupons of which are indexed to the prices of other securities, securities indices, currencies, precious metals or other commodities, or other financial indicators. The Fund may also enter into firm commitment agreements with banks or broker-dealers, and may invest up to 15% of its assets in illiquid securities. The Fund may buy put and call, sell (write) covered options, and enter into futures contracts and options on futures contracts for hedging, investment and risk management and to effect synthetic sales and purchases. The Fund's use of options on particular securities (as opposed to market indices) is limited such that the premiums paid by the Fund on all outstanding options it has purchased may not exceed 10% of its total assets. The Fund may also write options in connection with buy-and- write transactions, and use index futures on foreign indices for investment, anticipatory hedging and risk management. In addition, the Fund may use forward foreign currency contracts, currency futures contracts and related options, currency swap contracts, options on currencies, and buy and sell currencies for hedging and for currency risk management. The Fund may also use futures contracts and foreign currency forward contracts to create synthetic bonds and synthetic foreign currency denominated securities to approximate desired risk/return profiles where the non-synthetic security having the desired risk/return profile is either unavailable or possesses undesirable characteristics. In addition, the Fund may use interest rate and currency swap contracts, contracts for differences and interest rate caps, floors and collars for hedging, investment and risk management. The use of unsegregated futures contracts, related options, interest rate floors, caps and collars and interest rate swap contracts for risk management is limited to no more than 10% of the Fund's total net assets when aggregated with the Fund's traditional borrowings. This 10% limitation applies to the face amount of unsegregated futures contracts and related options and to the amount of a Fund's net payment obligation that is not segregated against in the case of interest rate floors, caps and collars and interest rate swap contracts. For a more detailed description of the investment practices described above and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices" later in this Prospectus. EMERGING COUNTRY DEBT FUND The Emerging Country Debt Fund seeks to earn high total return by investing primarily in sovereign debt (bonds, including convertible bonds, and loans) of countries in Asia, Latin America, the Middle East and Africa, as well as any country located in Europe which is not in the European Community ("Emerging Countries"). In addition to considerations relating to investment restrictions and tax barriers, allocation of the Fund's investments among selected emerging countries will be based on certain other relevant factors including the outlook for economic growth, currency exchange rates, interest rates, political factors and the stage of the local market cycle. The Fund will generally have at least 50% of its assets denominated in hard currencies such as the U.S. dollar, Japanese yen, Italian lira, British pound, Deutchmark, French franc and Canadian dollar. The Fund will attempt to provide a total return greater than that generally provided by the international fixed income securities markets as measured by an index selected from time to time by the Manager. The Fund has a fundamental policy that, under normal market conditions, at least 65% of its total assets will be invested in debt securities of Emerging Countries. In addition, the Fund may invest in fixed income securities of any maturity, although the Fund expects that at least 65% of its total assets will be comprised of "bonds" as such term is defined above. Fixed income securities include securities issued by federal, state, local and foreign governments, and a wide range of private issuers. The Emerging Country Debt Fund's investments in Emerging Country debt instruments are subject to special risks that are in addition to the usual risks of investing in debt securities of developed foreign markets around the world, and investors are strongly advised to consider those risks carefully. See "Descriptions and Risks of Fund Investment Practices -- Certain Risks of Foreign Investments." The Fund may enter into loan participation agreements and other direct investments, forward foreign exchange agreements, invest in Brady bonds and purchase or sell securities on a when-issued or delayed delivery basis. The Fund may also lend portfolio securities valued at up to one third of total assets, invest without limit in lower rated securities (also known as "junk bonds"), and invest in adjustable rate securities, zero coupon securities and depository receipts of foreign issuers. The Fund may also enter into repurchase agreements, reverse repurchase agreements and dollar roll agreements. In addition, the Fund may invest in mortgage-backed and other asset-backed securities issued by the U.S. government, its agencies and by non-government issuers, including collateral mortgage obligations ("CMO's"), strips and residuals. The Fund may also invest in indexed securities the redemption values and/or coupons of which are indexed to the prices of other securities, securities indices, currencies, precious metals or other commodities, or other financial indicators. The Fund may also enter into firm commitment agreements with banks or broker-dealers, and may invest up to 15% of its assets in illiquid securities. The Fund may buy put and call options, sell (write) covered options, and enter into futures contracts and options on futures contracts for hedging, investment and risk management and to effect synthetic sales and purchases. The Fund's use of options on particular securities (as opposed to market indices) is limited such that the premiums paid by the Fund on all outstanding options it has purchased may not exceed 10% of its total assets. The Fund may also write options in connection with buy- and-write transactions, and use index futures on foreign indices for investment, anticipatory hedging and risk management. In addition, the Fund may use forward foreign currency contracts, currency futures contracts and related options, currency swap contracts, options on currencies, and buy and sell currencies for hedging, and for currency risk management. The Fund may also use synthetic bonds and synthetic foreign currency denominated securities to approximate desired risk/return profiles where the desired profile is either unavailable or possesses undesirable characteristics. In addition, the Fund may use interest rate swap contracts, contracts for differences and interest rate caps, floors and collars for hedging, investment and risk management. For a detailed description of the investment practices described in the four preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices" later in this Prospectus. CORE EMERGING COUNTRY DEBT FUND The Core Emerging Country Debt Fund seeks to earn high total return by investing primarily in sovereign debt (bonds, including convertible bonds, and loans) of Emerging Countries. The Fund's investments will be concentrated in emerging country debt issues having above average marketability. In addition to considerations relating to investment restrictions and tax barriers, allocation of the Fund's investments among selected emerging countries will be based on certain other relevant factors including the outlook for economic growth, currency exchange rates, interest rates, political factors and the stage of the local market cycle. The Fund will generally have at least 50% of its assets denominated in hard currencies such as the U.S. dollar, Japanese yen, Italian lira, British pound, Deutchmark, French franc and Canadian dollar. The Fund will attempt to provide a total return greater than that generally provided by the international fixed income securities markets as measured by an index selected from time to time by the Manager. The Fund has a fundamental policy that, under normal market conditions, at least 65% of its total assets will be invested in debt securities of Emerging Countries. In addition, the Fund may invest in fixed income securities of any maturity, although the Fund expects that at least 65% of its total assets will be comprised of "bonds" as such term is defined above. Fixed income securities include securities issued by federal, state, local and foreign governments, and a wide range of private issuers. The investments of the Core Emerging Country Debt Fund in Emerging Country debt instruments are subject to special risks that are in addition to the usual risks of investing in debt securities of developed foreign markets around the world, and investors are strongly advised to consider those risks carefully. See "Descriptions and Risks of Fund Investment Practices -- Certain Risks of Foreign Investments." The Fund may enter into loan participation agreements and other direct investments, forward foreign exchange agreements, invest in Brady bonds and purchase or sell securities on a when-issued or delayed delivery basis. The Fund may also lend portfolio securities valued at up to one-third of total assets, invest without limit in lower rated securities (also known as "junk bonds"), and invest in adjustable rate securities, zero coupon securities and depository receipts of foreign issuers. The Fund may also enter into repurchase agreements, reverse repurchase agreements and dollar roll agreements. In addition, the Fund may invest in mortgage-backed and other asset-backed securities issued by the U.S. government, its agencies and by non-government issuers, including collateral mortgage obligations ("CMO's"), strips and residuals. The Fund may also invest in indexed securities the redemption values and/or coupons of which are indexed to the prices of other securities, securities indices, currencies, precious metals or other commodities, or other financial indicators. The Fund may also enter into firm commitment agreements with banks or broker-dealers, and may invest up to 15% of its assets in illiquid securities. The Fund may buy put and call options, sell (write) covered options, and enter into futures contracts and options on futures contracts for hedging, investment and risk management and to effect synthetic sales and purchases. The Fund's use of options on particular securities (as opposed to market indices) is limited such that the premiums paid by the Fund on all outstanding options it has purchased may not exceed 10% of its total assets. The Fund may also write options in connection with buy- and-write transactions, and use index futures on foreign indices for investment, anticipatory hedging and risk management. In addition, the Fund may use forward foreign currency contracts, currency futures contracts and related options, currency swap contracts, options on currencies, and buy and sell currencies for hedging, and for currency risk management. The Fund may also use synthetic bonds and synthetic foreign currency denominated securities to approximate desired risk/return profiles where the desired profile is either unavailable or possesses undesirable characteristics. In addition, the Fund may use interest rate swap contracts, contracts for differences and interest rate caps, floors and collars for hedging, investment and risk management. For a detailed description of the investment practices described in the four preceding paragraphs and the risks associated with them, see "Descriptions and Risks of Fund Investment Practices" later in this Prospectus. DESCRIPTIONS AND RISKS OF FUND INVESTMENT PRACTICES The following is a detailed description of the various investment practices in which the Funds may engage and the risks associated with their use. Not all Funds may engage in all practices described below. Please refer to the "Investment Objectives and Policies" section above for determination of which practices a particular Fund may engage in. PORTFOLIO TURNOVER Portfolio turnover is not a limiting factor with respect to investment decisions for the Funds. The portfolio turnover rate of those Funds with at least five months of operational history is shown under the heading "Financial Highlights." In any particular year, market conditions may well result in greater rates than are presently anticipated. However, portfolio turnover for the Core Emerging Country Debt Fund, the Currency Hedged International Core Fund, the Global Bond Fund and the Foreign Fund is not expected to exceed 150%. High portfolio turnover involves correspondingly greater brokerage commissions and other transaction costs, which will be borne directly by the relevant Fund, and could involve realization of capital gains that would be taxable when distributed to shareholders of the relevant Fund unless such shareholders are themselves exempt. See "Taxes" section below. DIVERSIFIED AND NON-DIVERSIFIED PORTFOLIOS It is a fundamental policy of each of the Core Fund, the Tobacco-Free Core Fund, the Core II Secondaries Fund, the Fundamental Value Fund, the International Core Fund, and the International Small Companies Fund, which may not be changed without shareholder approval, that (i) no more than 5% of the relevant Fund's assets will be invested in the securities of any one issuer, although up to 25% of each Fund's assets may be invested without regard to this restriction and (ii) the Fund may not own more than 10% of the outstanding voting securities of any single issuer. Each such Fund is referred to herein as a "diversified" fund. All other Funds are "non-diversified" funds under the 1940 Act, and as such are not required to satisfy the "diversified" requirements stated above. As a non-diversified fund, each of these Funds may invest a relatively high percentage of its assets in the securities of relatively few issuers that the Manager deems to be attractive investments, rather than invest in the securities of a large number of issuers merely to satisfy diversification requirements. Such concentration may increase the risk of loss to such Funds should there be a decline in the market value of any one portfolio security. Investment in a non-diversified fund may therefore entail greater risks than investment in a diversified fund. All Funds, however, must meet certain diversification standards to qualify as a "regulated investment company" under the Internal Revenue Code of 1986. CERTAIN RISKS OF FOREIGN INVESTMENTS GENERAL. Investment in foreign issuers or securities principally traded overseas may involve certain special risks due to foreign economic, political and legal developments, including favorable or unfavorable changes in currency exchange rates, exchange control regulations (including currency blockage), expropriation of assets or nationalization, imposition of withholding taxes on dividend or interest payments, and possible difficulty in obtaining and enforcing judgments against foreign entities. Furthermore, issuers of foreign securities are subject to different, often less comprehensive, accounting, reporting and disclosure requirements than domestic issuers. The securities of some foreign governments and companies and foreign securities markets are less liquid and at times more volatile than comparable U.S. securities and securities markets. Foreign brokerage commissions and other fees are also generally higher than in the United States. The laws of some foreign countries may limit a Fund's ability to invest in securities of certain issuers located in these foreign countries. There are also special tax considerations which apply to securities of foreign issuers and securities principally traded overseas. Investors should also be aware that under certain circumstances, markets which are perceived to have similar characteristics to troubled markets may be adversely affected whether or not similarities actually exist. EMERGING MARKETS. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. Disclosure and regulatory standards in many respects are less stringent than in the U.S. and developed foreign markets. There also may be a lower level of monitoring and regulation of securities markets in emerging market countries and the activities of investors in such markets, and enforcement of existing regulations has been extremely limited. Many emerging countries have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have very negative effects on the economies and securities markets of certain emerging countries. Economies in emerging markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values, and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be adversely affected by economic conditions in the countries in which they trade. The economies of countries with emerging markets may also be predominantly based on only a few industries or dependent on revenues from particular commodities. In addition, custodial services and other costs relating to investment in foreign markets may be more expensive in emerging markets than in many developed foreign markets, which could reduce a Fund's income from such securities. Finally, because publicly traded debt instruments of emerging markets represent a relatively recent innovation in the world debt markets, there is little historical data or related market experience concerning the attributes of such instruments under all economic, market and political conditions. In many cases, governments of emerging countries continue to exercise significant control over their economies, and government actions relative to the economy, as well as economic developments generally, may affect the capacity of issuers of emerging country debt instruments to make payments on their debt obligations, regardless of their financial condition. In addition, there is a heightened possibility of expropriation or confiscatory taxation, imposition of withholding taxes on interest payments, or other similar developments that could affect investments in those countries. There can be no assurance that adverse political changes will not cause a Fund to suffer a loss of any or all of its investments or, in the case of fixed-income securities, interest thereon. SECURITIES LENDING All of the Funds may make secured loans of portfolio securities amounting to not more than one-third of the relevant Fund's total assets, except for the International Core and Currency Hedged International Core Funds, each of which may make loans of portfolio securities amounting to not more than 25% of their respective total assets. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. However, such loans will be made only to broker-dealers that are believed by the Manager to be of relatively high credit standing. Securities loans are made to broker-dealers pursuant to agreements requiring that loans be continuously secured by collateral in cash or U.S. Government Securities at least equal at all times to the market value of the securities lent. The borrower pays to the lending Fund an amount equal to any dividends or interest the Fund would have received had the securities not been lent. If the loan is collateralized by U.S. Government Securities, the Fund will receive a fee from the borrower. In the case of loans collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower. Although voting rights or rights to consent with respect to the loaned securities pass to the borrower, the Fund retains the right to call the loans at any time on reasonable notice, and it will do so in order that the securities may be voted by the Fund if the holders of such securities are asked to vote upon or consent to matters materially affecting the investment. The Fund may also call such loans in order to sell the securities involved. The Manager has retained a lending agent on behalf of several of the Funds that is compensated based on a percentage of a Fund's return on the securities lending activity. The Fund also pays various fees in connection with such loans including shipping fees and reasonable custodian fees approved by the Trustees of the Trust or persons acting pursuant to direction of the Board. DEPOSITORY RECEIPTS Each Fund (except the Short-Term Income Fund) may invest in American Depositary Receipts (ADRs), Global Depository Receipts (GDRs) and European Depository Receipts (EDRs) (collectively, "Depository Receipts") if issues of such Depository Receipts are available that are consistent with a Fund's investment objective. Depository Receipts generally evidence an ownership interest in a corresponding foreign security on deposit with a financial institution. Transactions in Depository Receipts usually do not settle in the same currency in which the underlying securities are denominated or traded. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets and EDRs, in bearer form, are designed for use in European securities markets. GDRs may be traded in any public or private securities markets and may represent securities held by institutions located anywhere in the world. CONVERTIBLE SECURITIES A convertible security is a fixed-income security (a bond or preferred stock) which may be converted at a stated price within a specified period of time into a certain quantity of the common stock of the same or a different issuer. Convertible securities are senior to common stock in a corporation's capital structure, but are usually subordinated to similar non-convertible securities. Convertible securities provide, through their conversion feature, an opportunity to participate in capital appreciation resulting from a market price advance in a convertible security's underlying common stock. The price of a convertible security is influenced by the market value of the underlying common stock and tends to increase as the market value of the underlying stock rises, whereas it tends to decrease as the market value of the underlying stock declines. The Manager regards convertible securities as a form of equity security. FUTURES AND OPTIONS As has been described in the "Investment Objectives and Policies" section above, many of the Funds may use futures and options for various purposes. Such transactions may involve options, futures and related options on futures contracts, and those instruments may relate to particular equity and fixed income securities, equity and fixed income indices, and foreign currencies. The Funds may also enter into a combination of long and short positions (including spreads and straddles) for a variety of investment strategies, including protecting against changes in certain yield relationships. The use of futures contracts and options on futures contracts involves risk. Thus, while a Fund may benefit from the use of futures and options on futures, unanticipated changes in interest rates, securities prices, or currency exchange rates may result in poorer overall performance for the Fund than if it had not entered into any futures contracts or options transactions. Losses incurred in transactions in futures and options on futures and the costs of these transactions will affect a Fund's performance. See Appendix A, "Risks and Limitations of Options, Futures and Swaps" for a more detailed discussion of the limits, conditions and risks of the Funds' investments in futures contracts and related options. OPTIONS. As has been noted above, many Funds which may use options (1) may enter into contracts giving third parties the right to buy the Fund's portfolio securities for a fixed price at a future date (writing "covered call options"); (2) may enter into contracts giving third parties the right to sell securities to the Fund for a fixed price at a future date (writing "covered put options"); and (3) may buy the right to purchase securities from third parties ("call options") or the right to sell securities to third parties ("put options") for a fixed price at a future date. WRITING COVERED OPTIONS. Each of the International Equity Funds and Fixed Income Funds (except the Short- Term Income Fund) may seek to increase its return by writing covered call or put options on optionable securities or indices. A call option written by a Fund on a security gives the holder the right to buy the underlying security from the Fund at a stated exercise price; a put option gives the holder the right to sell the underlying security to the Fund at a stated exercise price. In the case of options on indices, the options are usually cash settled based on the difference between the strike price and the value of the index. Each such Fund will receive a premium for writing a put or call option, which increases the Fund's return in the event the option expires unexercised or is closed out at a profit. The amount of the premium will reflect, among other things, the relationship of the market price and volatility of the underlying security or securities index to the exercise price of the option, the remaining term of the option, supply and demand and interest rates. By writing a call option on a security, the Fund limits its opportunity to profit from any increase in the market value of the underlying security above the exercise price of the option. By writing a put option on a security, the Fund assumes the risk that it may be required to purchase the underlying security for an exercise price higher than its then current market value, resulting in a potential capital loss unless the security subsequently appreciates in value. In the case of options on an index, if a Fund writes a call, any profit by the Fund in respect of portfolio securities expected to correlate with the index will be limited by an increase in the index above the exercise price of the option. If the Fund writes a put on an index, the Fund may be required to make a cash settlement greater than the premium received if the index declines. A call option on a security is "covered" if a Fund owns the underlying security or has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other securities held in its portfolio. A call option is also covered if the Fund holds on a share-for-share basis a call on the same security as the call written where the exercise price of the call held is equal to or less than the exercise price of the call written or greater than the exercise price of the call written if the difference is maintained by the Fund in cash, U.S. Government Securities or other high grade debt obligations in a segregated account with its custodian. A put option is "covered" if the Fund maintains cash, U.S. Government Securities or other high grade debt obligations with a value equal to the exercise price in a segregated account with its custodian, or else holds on a share-for-share basis a put on the same security as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written. If the writer of an option wishes to terminate his obligation, he may effect a "closing purchase transaction." This is accomplished, in the case of exchange traded options, by buying an option of the same series as the option previously written. The effect of the purchase is that the writer's position will be canceled by the clearing corporation. The writer of an option may not effect a closing purchase transaction after he has been notified of the exercise of an option. Likewise, an investor who is the holder of an option may liquidate his position by effecting a "closing sale transaction." This is accomplished by selling an option of the same series as the option previously purchased. There is no guarantee that a Fund will be able to effect a closing purchase or a closing sale transaction at any particular time. Also, an over-the-counter option may be closed out only with the other party to the option transaction. Effecting a closing transaction in the case of a written call option will permit the Fund to write another call option on the underlying security with either a different exercise price or expiration date or both, or in the case of a written put option will permit the Fund to write another put option to the extent that the exercise price thereof is secured by deposited cash or high grade debt obligations. Also, effecting a closing transaction will permit the cash or proceeds from the concurrent sale of any securities subject to the option to be used for other Fund investments. If the Fund desires to sell a particular security from its portfolio on which it has written a call option, it will effect a closing transaction prior to or concurrent with the sale of the security. A Fund will realize a profit from a closing transaction if the price of the transaction is less than the premium received from writing the option or is more than the premium paid to purchase the option; the Fund will realize a loss from a closing transaction if the price of the transaction is more than the premium received from writing the option or is less than the premium paid to purchase the option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security or index of securities, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by appreciation of the underlying security or securities owned by the Fund. A Fund may write options in connection with buy-and- write transactions; that is, a Fund may purchase a security and then write a call option against that security. The exercise price of the call the Fund determines to write will depend upon the expected price movement of the underlying security. The exercise price of a call option may be below ("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the current value of the underlying security at the time the option is written. Buy- and-write transactions using in-the-money call options may be used when it is expected that the price of the underlying security will remain flat or decline moderately during the option period. Buy-and-write transactions using at-the- money call options may be used when it is expected that the price of the underlying security will remain fixed or advance moderately during the option period. Buy-and- write transactions using out-of-the-money call options may be used when it is expected that the premiums received from writing the call option plus the appreciation in the market price of the underlying security up to the exercise price will be greater than the appreciation in the price of the underlying security alone. If the call options are exercised in such transactions, the Fund's maximum gain will be the premium received by it for writing the option, adjusted upward or downward by the difference between the Fund's purchase price of the security and the exercise price. If the options are not exercised and the price of the underlying security declines, the amount of such decline will be offset in part, or entirely, by the premium received. The writing of covered put options is similar in terms of risk/return characteristics to buy-and-write transactions. If the market price of the underlying security rises or otherwise is above the exercise price, the put option will expire worthless and the Fund's gain will be limited to the premium received. If the market price of the underlying security declines or otherwise is below the exercise price, the Fund may elect to close the position or take delivery of the security at the exercise price. In that event, the Fund's return will be the premium received from the put option minus the cost of closing the position or, if it chooses to take delivery of the security, the premium received from the put option minus the amount by which the market price of the security is below the exercise price. Out-of-the- money, at-the-money and in-the-money put options may be used by the Fund in market environments analogous to those in which call options are used in buy-and-write transactions. The extent to which a Fund will be able to write and purchase call and put options may be restricted by the Fund's intention to qualify as a regulated investment company under the Internal Revenue Code. FUTURES. A financial futures contract sale creates an obligation by the seller to deliver the type of financial instrument called for in the contract in a specified delivery month for a stated price. A financial futures contract purchase creates an obligation by the purchaser to pay for and take delivery of the type of financial instrument called for in the contract in a specified delivery month, at a stated price. In some cases, the specific instruments delivered or taken, respectively, at settlement date are not determined until on or near that date. The determination is made in accordance with the rules of the exchange on which the futures contract sale or purchase was made. Some futures contracts are "cash settled" (rather than "physically settled," as described above) which means that the purchase price is subtracted from the current market value of the instrument and the net amount if positive is paid to the purchaser, and if negative is paid by the purchaser. Futures contracts are traded in the United States only on commodity exchanges or boards of trade -- known as "contract markets" -- approved for such trading by the Commodity Futures Trading Commission ("CFTC"), and must be executed through a futures commission merchant or brokerage firm which is a member of the relevant contract market. Under U.S. law, futures contracts on individual equity securities are not permitted. See Appendix A, "Risks and Limitations of Options, Futures and Swaps" for more information concerning these practices and their accompanying risks. The purchase or sale of a futures contract differs from the purchase or sale of a security or option in that no price or premium is paid or received. Instead, an amount of cash or U.S. Government Securities generally not exceeding 5% of the face amount of the futures contract must be deposited with the broker. This amount is known as initial margin. Subsequent payments to and from the broker, known as variation margin, are made on a daily basis as the price of the underlying futures contract fluctuates making the long and short positions in the futures contract more or less valuable, a process known as "marking to market." Prior to the settlement date of the futures contract, the position may be closed out by taking an opposite position which will operate to terminate the position in the futures contract. A final determination of variation margin is then made, additional cash is required to be paid to or released by the broker, and the purchaser realizes a loss or gain. In addition, a commission is paid on each completed purchase and sale transaction. In most cases futures contracts are closed out before the settlement date without the making or taking of delivery. Closing out a futures contract sale is effected by purchasing a futures contract for the same aggregate amount of the specific type of financial instrument or commodity and the same delivery date. If the price of the initial sale of the futures contract exceeds the price of the offsetting purchase, the seller is paid the difference and realizes a gain. Conversely, if the price of the offsetting purchase exceeds the price of the initial sale, the seller realizes a loss. Similarly, the closing out of a futures contract purchase is effected by the purchaser entering into a futures contract sale. If the offsetting sale price exceeds the purchase price, the purchaser realizes a gain, and if the purchase price exceeds the offsetting sale price, a loss will be realized. The ability to establish and close out positions on options on futures will be subject to the development and maintenance of a liquid secondary market. It is not certain that this market will develop or be maintained. INDEX FUTURES. Each of the Funds (except the Short- Term Income Fund) may purchase futures contracts on various securities indices ("Index Futures"). Each of the Domestic Equity Funds may purchase Index Futures on the S&P 500 ("S&P 500 Index Futures") and on such other domestic stock indices as the Manager may deem appropriate. The Japan Fund may purchase Index Futures on the Nikkei 225 Stock Average and on the Tokyo Stock Price Index ("TOPIX") (together with Nikkei 225 futures contracts, "Japanese Index Futures"). The International Core Fund, Currency Hedged International Core Fund, the Foreign Fund, the International Small Companies Fund and the Emerging Markets Fund may each purchase Index Futures on foreign stock indices, including those which may trade outside the United States. The Domestic Bond Fund, the International Bond Fund, the Currency Hedged International Bond Fund, the Global Bond Fund, the Emerging Country Debt Fund and the Core Emerging Country Debt Fund may each purchase Index Futures on domestic and (except for the Domestic Bond Fund) foreign fixed income securities indices, including those which may trade outside the United States. A Fund's purchase and sale of Index Futures is limited to contracts and exchanges which have been approved by the CFTC. An Index Future may call for "physical delivery" or be "cash settled." An Index Future that calls for physical delivery is a contract to buy an integral number of units of the particular securities index at a specified future date at a price agreed upon when the contract is made. A unit is the value from time to time of the relevant index. While a Fund that purchases an Index Future that calls for physical delivery is obligated to pay the face amount on the stated date, such an Index Future may be closed out on that date or any earlier date by selling an Index Future with the same face amount and contract date. This will terminate the Fund's position and the Fund will realize a profit or a loss based on the difference between the cost of purchasing the original Index Future and the price obtained from selling the closing Index Future. The amount of the profit or loss is determined by the change in the value of the relevant index while the Index Future was held. Index Futures that are "cash settled" provide by their terms for settlement on a net basis reflecting changes in the value of the underlying index. Thus, the purchaser of such an Index Future is never obligated to pay the face amount of the contract. The net payment obligation may in fact be very small in relation to the face amount. The use of Index Futures involves risk. See Appendix A, "Risks and Limitations of Options, Futures and Swaps" for a more detailed discussion of the limits, conditions and risks of the Funds' investment in futures contracts. INTEREST RATE FUTURES. For the purposes previously described, the Fixed Income Funds (other than the Short- Term Income Fund) may engage in a variety of transactions involving the use of futures with respect to U.S. Government Securities and other fixed income securities. The use of interest rate futures involves risk. See Appendix A, "Risks and Limitations of Options, Futures and Swaps" for a more detailed discussion of the limits, conditions and risks of the Fund's investment in futures contracts. OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give the purchaser the right in return for the premium paid to assume a position in a futures contract at the specified option exercise price at any time during the period of the option. Funds may use options on futures contracts in lieu of writing or buying options directly on the underlying securities or purchasing and selling the underlying futures contracts. For example, to hedge against a possible decrease in the value of its portfolio securities, a Fund may purchase put options or write call options on futures contracts rather than selling futures contracts. Similarly, a Fund may purchase call options or write put options on futures contracts as a substitute for the purchase of futures contracts to hedge against a possible increase in the price of securities which the Fund expects to purchase. Such options generally operate in the same manner as options purchased or written directly on the underlying investments. See "Descriptions and Risks of Fund Investment Practices -- Foreign Currency Transactions" for a description of the Funds' use of options on currency futures. USES OF OPTIONS, FUTURES AND OPTIONS ON FUTURES RISK MANAGEMENT. When futures and options on futures are used for risk management, a Fund will generally take long positions (e.g., purchase call options, futures contracts or options thereon) in order to increase the Fund's exposure to a particular market, market segment or foreign currency. For example, if a Fixed Income Fund wants to increase its exposure to a particular fixed income security, the Fund may take long positions in futures contracts on that security. Likewise, if an Equity Fund holds a portfolio of stocks with an average volatility (beta) lower than that of the Fund's benchmark securities index as a whole (deemed to be 1.00), the Fund may purchase Index Futures to increase its average volatility to 1.00. In the case of futures and options on futures, a Fund is only required to deposit the initial and variation margin as required by relevant CFTC regulations and the rules of the contract markets. Because the Fund will then be obligated to purchase the security or index at a set price on a future date, the Fund's net asset value will fluctuate with the value of the security as if it were already included in the Fund's portfolio. Risk management transactions have the effect of providing a degree of investment leverage, particularly when the Fund does not segregate assets equal to the face amount of the contract (i.e., in cash settled futures contracts) since the futures contract (and related options) will increase or decrease in value at a rate which is a multiple of the rate of increase or decrease in the value of the initial and variable margin that the Fund is required to deposit. As a result, the value of the Fund's portfolio will generally be more volatile than the value of comparable portfolios which do not engage in risk management transactions. A Fund will not, however, use futures and options on futures to obtain greater volatility than it could obtain through direct investment in securities; that is, a Fund will not normally engage in risk management to increase the average volatility (beta) of that Fund's portfolio above 1.00, the level of risk (as measured by volatility) that would be present if the Fund were fully invested in the securities comprising the relevant index. However, a Fund may invest in futures and options on futures without regard to this limitation if the face value of such investments, when aggregated with the Index Futures equity swaps and contracts for differences as described below does not exceed 10% of a Fund's assets. HEDGING. To the extent indicated elsewhere, a Fund may also enter into options, futures contracts and buy and sell options thereon for hedging. For example, if a Fund wants to hedge certain of its fixed income securities against a decline in value resulting from a general increase in market rates of interest, it might sell futures contracts with respect to fixed income securities or indices of fixed income securities. If the hedge is effective, then should the anticipated change in market rates cause a decline in the value of the Fund's fixed income security, the value of the futures contract should increase. Likewise, the Equity Funds may sell equity index futures if a Fund wants to hedge its equity securities against a general decline in the relevant equity market(s). The Funds may also use futures contracts in anticipatory hedge transactions by taking a long position in a futures contract with respect to a security, index or foreign currency that a Fund intends to purchase (or whose value is expected to correlate closely with the security or currency to be purchased) pending receipt of cash from other transactions (including the proceeds from this offering) to be used for the actual purchase. Then if the cost of the security or foreign currency to be purchased by the Fund increases and if the anticipatory hedge is effective, that increased cost should be offset, at least in part, by the value of the futures contract. Options on futures contracts may be used for hedging as well. For example, if the value of a fixed-income security in a Fund's portfolio is expected to decline as a result of an increase in rates, the Fund might purchase put options or write call options on futures contracts rather than selling futures contracts. Similarly, for anticipatory hedging, the Fund may purchase call options or write put options as a substitute for the purchase of futures contracts. See "Descriptions and Risks of Fund Investment Practices -- Foreign Currency Transactions" for more information regarding the currency hedging practices of certain Funds. INVESTMENT PURPOSES. To the extent indicated elsewhere, a Fund may also enter into futures contracts and buy and sell options thereon for investment. For example, a Fund may invest in futures when its Manager believes that there are not enough attractive securities available to maintain the standards of diversity and liquidity set for a Fund pending investment in such securities if or when they do become available. Through this use of futures and related options, a Fund may diversify risk in its portfolio without incurring the substantial brokerage costs which may be associated with investment in the securities of multiple issuers. This use may also permit a Fund to avoid potential market and liquidity problems (e.g., driving up the price of a security by purchasing additional shares of a portfolio security or owning so much of a particular issuer's stock that the sale of such stock depresses that stock's price) which may result from increases in positions already held by the Fund. When any Fund purchases futures contracts for investment, it will maintain cash, U.S. Government Securities or other high grade debt obligations in a segregated account with its custodian in an amount which, together with the initial and variation margin deposited on the futures contracts, is equal to the face value of the futures contracts at all times while the futures contracts are held. Incidental to other transactions in fixed income securities, for investment purposes a Fund may also combine futures contracts or options on fixed income securities with cash, cash equivalent investments or other fixed income securities in order to create "synthetic" bonds which approximate desired risk and return profiles. This may be done where a "non-synthetic" security having the desired risk/return profile either is unavailable (e.g., short-term securities of certain foreign governments) or possesses undesirable characteristics (e.g., interest payments on the security would be subject to foreign withholding taxes). A Fund may also purchase forward foreign exchange contracts in conjunction with U.S. dollar-denominated securities in order to create a synthetic foreign currency denominated security which approximates desired risk and return characteristics where the non-synthetic securities either are not available in foreign markets or possess undesirable characteristics. For greater detail, see "Foreign Currency Transactions" below. When a Fund creates a "synthetic" bond with a futures contract, it will maintain cash, U.S. Government securities or other high grade debt obligations in a segregated account with its custodian with a value at least equal to the face amount of the futures contract (less the amount of any initial or variation margin on deposit). SYNTHETIC SALES AND PURCHASES. Futures contracts may also be used to reduce transaction costs associated with short-term restructuring of a Fund's portfolio. For example, if a Fund's portfolio includes stocks of companies with medium-sized equity capitalization (e.g., between $300 million and $5.2 billion) and, in the opinion of the Manager, such stocks are likely to underperform larger capitalization stocks, the Fund might sell some or all of its mid-capitalization stocks, buy large capitalization stocks with the proceeds and then, when the expected trend had played out, sell the large capitalization stocks and repurchase the mid-capitalization stocks with the proceeds. In the alternative, the Fund may use futures to achieve a similar result with reduced transaction costs. In that case, the Fund might simultaneously enter into short futures positions on an appropriate index (e.g., the S&P Mid Cap 400 Index) (to synthetically "sell" the stocks in the Fund) and long futures positions on another index (e.g., the S&P 500) (to synthetically buy the larger capitalization stocks). When the expected trend has played out, the Fund would then close out both futures contract positions. A Fund will only enter into these combined positions if (1) the short position (adjusted for historic volatility) operates as a hedge of existing portfolio holdings, (2) the face amount of the long futures position is less than or equal to the value of the portfolio securities that the Fund would like to dispose of, (3) the contract settlement date for the short futures position is approximately the same as that for the long futures position and (4) the Fund segregates an amount of cash, U.S. Government Securities and other high-quality debt obligations whose value, marked-to-market daily, is equal to the Fund's current obligations in respect of the long futures contract positions. If a Fund uses such combined short and long positions, in addition to possible declines in the values of its investment securities, the Fund may also suffer losses associated with a securities index underlying the long futures position underperforming the securities index underlying the short futures position. However, the Manager will enter into these combined positions only if the Manager expects that, overall, the Fund will perform as if it had sold the securities hedged by the short position and purchased the securities underlying the long position. A Fund may also use swaps and options on futures to achieve the same objective. For more information, see Appendix A, "Risks and Limitations of Options, Futures and Swaps." SWAP CONTRACTS AND OTHER TWO-PARTY CONTRACTS As has been described in the "Investment Objectives and Policies" section above, many of the Funds may use swap contracts and other two-party contracts for the same or similar purposes as they may use options, futures and related options. The use of swap contracts and other two- party contracts involves risk. See Appendix A, "Risks and Limitations of Options, Futures and Swaps" for a more detailed discussion of the limits, conditions and risks of the Funds' investments in swaps and other two-party contracts. SWAP CONTRACTS. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard "swap" transaction, two parties agree to exchange returns (or differentials in rates of return) calculated with respect to a "notional amount," e.g., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a "basket" of securities representing a particular index. A Fund will usually enter into swaps on a net basis, i.e., the two returns are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two returns. INTEREST RATE AND CURRENCY SWAP CONTRACTS. Interest rate swaps involve the exchange of the two parties' respective commitments to pay or receive interest on a notional principal amount (e.g., an exchange of floating rate payments for fixed rate payments). Currency swaps involve the exchange of the two parties' respective commitments to pay or receive fluctuations with respect to a notional amount of two different currencies (e.g., an exchange of payments with respect to fluctuations in the value of the U.S. dollar relative to the Japanese yen). EQUITY SWAP CONTRACTS AND CONTRACTS FOR DIFFERENCES. As described under "Investment Objectives and Policies -- International Equity Funds -- Global Hedged Equity Fund," equity swap contracts involve the exchange of one party's obligation to pay the loss, if any, with respect to a notional amount of a particular equity index (e.g., the S&P 500 Index) plus interest on such notional amount at a designated rate (e.g., the London Inter-Bank Offered Rate) in exchange for the other party's obligation to pay the gain, if any, with respect to the notional amount of such index. If a Fund enters into a long equity swap contract, the Fund's net asset value will fluctuate as a result of changes in the value of the equity index on which the equity swap is based as if it had purchased the notional amount of securities comprising the index. The Funds will not use long equity swap contracts to obtain greater volatility than it could obtain through direct investment in securities; that is, a Fund will not normally enter an equity swap contract to increase the volatility (beta) of the Fund's portfolio above 1.00, the volatility that would be present in the stocks comprising the Fund's benchheld Index. However, a Fund may invest in long equity swap contracts without regard to this limitation if the notional amount of such equity swap contracts, when aggregated with the Index Futures as described above and the contracts for differences as described below, does not exceed 10% of a Fund's net assets. Contracts for differences are swap arrangements in which a Fund may agree with a counterparty that its return (or loss) will be based on the relative performance of two different groups or "baskets" of securities. As to one of the baskets, the Fund's return is based on theoretical long futures positions in the securities comprising that basket (with an aggregate face value equal to the notional amount of the contract for differences) and as to the other basket, the Fund's return is based on theoretical short futures positions in the securities comprising the basket. The Fund may also use actual long and short futures positions to achieve the same market exposure(s) as contracts for differences. The Funds will only enter into contracts for differences where payment obligations of the two legs of the contract are netted and thus based on changes in the relative value of the baskets of securities rather than on the aggregate change in the value of the two legs. The Funds will only enter into contracts for differences (and analogous futures positions) when the Manager believes that the basket of securities constituting the long leg will outperform the basket constituting the short leg. However, it is possible that the short basket will outperform the long basket - resulting in a loss to the Fund, even in circumstances where the securities in both the long and short baskets appreciate in value. Except for instances in which a Fund elects to obtain leverage up to the 10% limitation mentioned above, a Fund will maintain cash, U.S. Government Securities or other high grade debt obligations in a segregated account with its custodian in an amount equal to the aggregate of net payment obligations on its swap contracts and contracts for differences, marked to market daily. A Fund may enter into swaps and contracts for differences for hedging, investment and risk management. When using swaps for hedging, a Fund may enter into an interest rate, currency or equity swap, as the case may be, on either an asset-based or liability-based basis, depending on whether it is hedging its assets or its liabilities. For risk management or investment purposes a Fund may also enter into a contract for differences in which the notional amount of the theoretical long position is greater than the notional amount of the theoretical short position. A Fund will not normally enter into a contract for differences to increase the volatility (beta) of the Fund's portfolio above 1.00. However, a Fund may invest in contracts for differences without regard to this limitation if the aggregate amount by which the theoretical long positions of such contracts exceed the theoretical short positions of such contacts, when aggregated with the Index Futures and equity swaps contracts as described above, does not exceed 10% of a Fund's net assets. INTEREST RATE CAPS, FLOORS AND COLLARS. The Funds may use interest rate caps, floors and collars for the same purposes or similar purposes as for which they use interest rate futures contracts and related options. Interest rate caps, floors and collars are similar to interest rate swap contracts because the payment obligations are measured by changes in interest rates as applied to a notional amount and because they are individually negotiated with a specific counterparty. The purchase of an interest rate cap entitles the purchaser, to the extent that a specific index exceeds a specified interest rate, to receive payments of interest on a notional principal amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below specified interest rates, to receive payments of interest on a notional principal amount from the party selling the interest rate floor. The purchase of an interest rate collar entitles the purchaser, to the extent that a specified index exceeds or falls below two specified interest rates, to receive payments of interest on a notional principal amount from the party selling the interest rate collar. Except when using such contracts for risk management, each Fund will maintain cash, U.S. Government Securities or other high grade debt obligations in a segregated account with its custodian in an amount at least equal to its obligations, if any, under interest rate cap, floor and collar arrangements. As with futures contracts, when a Fund uses notional amount contracts for risk management it is only required to segregate assets equal to its net payment obligation, not the notional amount of the contract. In those cases, the notional amount contract will have the effect of providing a degree of investment leverage similar to the leverage associated with non-segregated futures contracts. The Funds' use of interest rate caps, floors and collars for the same or similar purposes as those for which they use futures contracts and related options present the same risks and similar opportunities to those associated with futures and related options. For a description of certain limitations on the Funds' use of caps, floors and collars, see Appendix A, "Risks and Limitations of Options, Futures and Swaps -- Additional Regulatory Limitations on the Use of Futures, Related Options, Interest Rate Floors, Caps and Collars and Interest Rate and Currency Swap Contracts." Because caps, floors and collars are recent innovations for which standardized documentation has not yet been developed they are deemed by the SEC to be relatively illiquid investments which are subject to a Fund's limitation on investment in illiquid securities. See "Descriptions and Risks of Fund Investment Practices -- Illiquid Securities." FOREIGN CURRENCY TRANSACTIONS To the extent each of the International Funds and the Fundamental Value Fund is invested in foreign securities, it may buy or sell foreign currencies or may deal in forward foreign currency contracts, that is, agree to buy or sell a specified currency at a specified price and future date. These Funds may use forward contracts for hedging, investment or currency risk management. These Funds may enter into forward contracts for hedging under three circumstances. First, when a Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may desire to "lock in" the U.S. dollar price of the security. By entering into a forward contract for the purchase or sale, for a fixed amount of dollars, of the amount of foreign currency involved in the underlying security transaction, the Fund will be able to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the subject foreign currency during the period between the date on which the security is purchased or sold and the date on which payment is made or received. Second, when the Manager of a Fund believes that the currency of a particular foreign country may suffer a substantial decline against the U.S. dollar, it may enter into a forward contract to sell, for a fixed amount of dollars, the amount of foreign currency approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency. Maintaining a match between the forward contract amounts and the value of the securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. Third, the Funds may engage in currency "cross hedging" when, in the opinion of the Manager, the historical relationship among foreign currencies suggests that the Funds may achieve the same protection for a foreign security at reduced cost through the use of a forward foreign currency contract relating to a currency other than the U.S. dollar or the foreign currency in which the security is denominated. By engaging in cross hedging transactions, the Funds assume the risk of imperfect correlation between the subject currencies. These practices may present risks different from or in addition to the risks associated with investments in foreign currencies. See Appendix A, "Risks and Limitations of Options, Futures and Swaps." A Fund is not required to enter into hedging transactions with regard to its foreign currency-denominated securities and will not do so unless deemed appropriate by the Manager. By entering into the above hedging transactions, the Funds may be required to forego the benefits of advantageous changes in the exchange rates. Each of the International Funds may also enter foreign currency forward contracts for investment and currency risk management. When a Fund uses currency instruments for such purposes, the foreign currency exposure of the Fund may differ substantially from the currencies in which the Fund's investment securities are denominated. However, a Fund's aggregate foreign currency exposure will not normally exceed 100% of the value of the Fund's securities, except that a Fund may use currency instruments without regard to this limitation if the amount of such excess, when aggregated with futures contracts, equity swap contracts and contracts for differences used in similar ways, does not exceed 10% of a Fund's net assets. The International Bond Fund, the Currency Hedged International Bond Fund, the Global Bond Fund, the Emerging Country Debt Fund and the Core Emerging Country Debt Fund may each also enter into foreign currency forward contracts to give fixed income securities denominated in one currency (generally the U.S. dollar) the risk characteristics of similar securities denominated in another currency as described above under "Uses of Options Futures and Options on Futures--Investment Purposes" or for risk management in a manner similar to such Funds' use of futures contracts and related options. Except to the extent that the Funds may use such contracts for risk management, whenever a Fund enters into a foreign currency forward contract, other than a forward contract entered into for hedging, it will maintain cash, U.S. Government securities or other high grade debt obligations in a segregated account with its custodian with a value, marked to market daily, equal to the amount of the currency required to be delivered. A Fund's ability to engage in forward contracts may be limited by tax considerations. A Fund may use currency futures contracts and related options and options on currencies for the same reasons for which they use currency forwards. Except to the extent that the Funds may use futures contracts and related options for risk management, a Fund will, so long as it is obligated as the writer of a call option on currency futures, own on a contract-for-contract basis an equal long position in currency futures with the same delivery date or a call option on currency futures with the difference, if any, between the market value of the call written and the market value of the call or long currency futures purchased maintained by the Fund in cash, U.S. Government securities or other high grade debt obligations in a segregated account with its custodian. If at the close of business on any day the market value of the call purchased by a Fund falls below 100% of the market value of the call written by the Fund, the Fund will maintain an amount of cash, U.S. Government securities or other high grade debt obligations in a segregated account with its custodian equal in value to the difference. Alternatively, the Fund may cover the call option by owning securities denominated in the currency with a value equal to the face amount of the contract(s) or through segregating with the custodian an amount of the particular foreign currency equal to the amount of foreign currency per futures contract option times the number of options written by the Fund. REPURCHASE AGREEMENTS A Fund may enter into repurchase agreements with banks and broker-dealers by which the Fund acquires a security (usually an obligation of the Government where the transaction is initiated or in whose currency the agreement is denominated) for a relatively short period (usually not more than a week) for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed-on price and date. The resale price is in excess of the acquisition price and reflects an agreed-upon market rate unrelated to the coupon rate on the purchased security. Such transactions afford an opportunity for the Fund to earn a return on temporarily available cash at no market risk, although there is a risk that the seller may default in its obligation to pay the agreed-upon sum on the redelivery date. Such a default may subject the relevant Fund to expenses, delays and risks of loss including: (a) possible declines in the value of the underlying security during the period while the Fund seeks to enforce its rights thereto, (b) possible reduced levels of income and lack of access to income during this period and (c) inability to enforce rights and the expenses involved in attempted enforcement. DEBT AND OTHER FIXED INCOME SECURITIES GENERALLY Debt and Other Fixed Income Securities include fixed income securities of any maturity, although, under normal circumstances, a Fixed Income Fund (other than the Short- Term Income Fund) will only invest in a security if, at the time of such investment, at least 65% of its total assets will be comprised of bonds, as defined in "Investment Objectives and Policies -- Fixed Income Funds" above. Fixed income securities pay a specified rate of interest or dividends, or a rate that is adjusted periodically by reference to some specified index or market rate. Fixed income securities include securities issued by federal, state, local and foreign governments and related agencies, and by a wide range of private issuers. Fixed income securities are subject to market and credit risk. Market risk relates to changes in a security's value as a result of changes in interest rates generally. In general, the values of fixed income securities increase when prevailing interest rates fall and decrease when interest rates rise. Credit risk relates to the ability of the issuer to make payments of principal and interest. Obligations of issuers are subject to the provisions of bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform Act of 1978, affecting the rights and remedies of creditors. Fixed income securities denominated in foreign currencies are also subject to the risk of a decline in the value of the denominating currency. Because interest rates vary, it is impossible to predict the future income of a Fund investing in such securities. The net asset value of each such Fund's shares will vary as a result of changes in the value of the securities in its portfolio and will be affected by the absence and/or success of hedging strategies. TEMPORARY HIGH QUALITY CASH ITEMS Each of the Domestic Equity and International Equity Funds may temporarily invest a portion of its assets in cash or cash items pending other investments or in connection with the maintenance of a segregated account. These cash items must be of high quality and may include a number of money market instruments such as securities issued by the United States government and agencies thereof, bankers' acceptances, commercial paper, and bank certificates of deposit. By investing only in high quality money market securities a Fund will seek to minimize credit risk with respect to such investments. The Short-Term Income Fund may make many of the same investments, although it imposes less strict restrictions concerning the quality of such investments. See "Investment Objectives and Policies -- Fixed Income Funds -- Short-Term Income Fund" for a general description of various types of money market instruments. U.S. GOVERNMENT SECURITIES AND FOREIGN GOVERNMENT SECURITIES U.S. Government Securities include securities issued or guaranteed by the U.S. government or its authorities, agencies or instrumentalities. Foreign Government Securities include securities issued or guaranteed by foreign governments (including political subdivisions) or their authorities, agencies or instrumentalities or by supranational agencies. U.S. Government Securities and Foreign Government Securities have different kinds of government support. For example, some U.S. Government Securities, such as U.S. Treasury bonds, are supported by the full faith and credit of the United States, whereas certain other U.S. Government Securities issued or guaranteed by federal agencies or government-sponsored enterprises are not supported by the full faith and credit of the United States. Similarly, some Foreign Government Securities are supported by the full faith and credit of a foreign national government or political subdivision and some are not. In the case of certain countries, Foreign Government Securities may involve varying degrees of credit risk as a result of financial or political instability in such countries and the possible inability of a Fund to enforce its rights against the foreign government issuer. Supra-national agencies are agencies whose member nations make capital contributions to support the agencies' activities, and include such entities as the International Bank for Reconstruction and Development (the World Bank), the Asian Development Bank, the European Coal and Steel Community and the Inter-American Development Bank. Like other fixed income securities, U.S. Government Securities and Foreign Government Securities are subject to market risk and their market values fluctuate as interest rates change. Thus, for example, the value of an investment in a Fund which holds U.S. Government Securities or Foreign Government Securities may fall during times of rising interest rates. Yields on U.S. Government Securities and Foreign Government Securities tend to be lower than those of corporate securities of comparable maturities. In addition to investing directly in U.S. Government Securities and Foreign Government Securities, a Fund may purchase certificates of accrual or similar instruments evidencing undivided ownership interests in interest payments or principal payments, or both, in U.S. Government Securities and Foreign Government Securities. These certificates of accrual and similar instruments may be more volatile than other government securities. MORTGAGE-BACKED AND OTHER ASSET-BACKED SECURITIES Mortgage-backed and other asset-backed securities may be issued by the U.S. government, its agencies or instrumentalities, or by non-governmental issuers. Interest and principal payments (including prepayments) on the mortgages underlying mortgage-backed securities are passed through to the holders of the mortgage-backed security. Prepayments occur when the mortgagor on an individual mortgage prepays the remaining principal before the mortgage's scheduled maturity date. As a result of the pass-through of prepayments of principal on the underlying mortgages, mortgage-backed securities are often subject to more rapid prepayment of principal than their stated maturity would indicate. Because the prepayment characteristics of the underlying mortgages vary, there can be no certainty as to the predicted yield or average life of a particular issue of pass-through certificates. Prepayments are important because of their effect on the yield and price of the securities. During periods of declining interest rates, such prepayments can be expected to accelerate and a Fund would be required to reinvest the proceeds at the lower interest rates then available. In addition, prepayments of mortgages which underlie securities purchased at a premium could result in capital losses because the premium may not have been fully amortized at the time the obligation was prepaid. As a result of these principal prepayment features, the values of mortgage-backed securities generally fall when interest rates rise, but their potential for capital appreciation in periods of falling interest rates is limited because of the prepayment feature. The mortgage-backed securities purchased by a Fund may include Adjustable Rate Securities as such term is defined in "Descriptions and Risks of Fund Investment Practices -- Adjustable Rate Securities" below. Other "asset-backed securities" include securities backed by pools of automobile loans, educational loans and credit card receivables. Mortgage-backed and asset-backed securities of non-governmental issuers involve prepayment risks similar to those of U.S. government guaranteed mortgage-backed securities and also involve risk of loss of principal if the obligors of the underlying obligations default in payment of the obligations. COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"); STRIPS AND RESIDUALS. A CMO is a security backed by a portfolio of mortgages or mortgage-backed securities held under an indenture. The issuer's obligation to make interest and principal payments is secured by the underlying portfolio of mortgages or mortgage-backed securities. CMOs are issued in multiple classes or series which have different maturities representing interests in some or all of the interest or principal on the underlying collateral or a combination thereof. CMOs of different classes are generally retired in sequence as the underlying mortgage loans in the mortgage pool are repaid. In the event of sufficient early prepayments on such mortgages, the class or series of CMO first to mature generally will be retired prior to its stated maturity. Thus, the early retirement of a particular class or series of CMO held by a Fund would have the same effect as the prepayment of mortgages underlying a mortgage-backed pass-through security. CMOs include securities ("Residuals") representing the interest in any excess cash flow and/or the value of any collateral remaining on mortgages or mortgage-backed securities from the payment of principal of and interest on all other CMOs and the administrative expenses of the issuer. Residuals have value only to the extent income from such underlying mortgages or mortgage-backed securities exceeds the amounts necessary to satisfy the issuer's debt obligations represented by all other outstanding CMOs. CMOs also include certificates representing undivided interests in payments of interest-only or principal-only ("IO/PO Strips") on the underlying mortgages. IO/PO Strips and Residuals tend to be more volatile than other types of securities. IO Strips and Residuals also involve the additional risk of loss of a substantial portion of or the entire value of the investment if the underlying securities are prepaid. In addition, if a CMO bears interest at an adjustable rate, the cash flows on the related Residual will also be extremely sensitive to the level of the index upon which the rate adjustments are based. ADJUSTABLE RATE SECURITIES Adjustable rate securities are securities that have interest rates that are reset at periodic intervals, usually by reference to some interest rate index or market interest rate. They may be U.S. Government Securities or securities of other issuers. Some adjustable rate securities are backed by pools of mortgage loans. Although the rate adjustment feature may act as a buffer to reduce sharp changes in the value of adjustable rate securities, these securities are still subject to changes in value based on changes in market interest rates or changes in the issuer's creditworthiness. Because the interest rate is reset only periodically, changes in the interest rates on adjustable rate securities may lag changes in prevailing market interest rates. Also, some adjustable rate securities (or, in the case of securities backed by mortgage loans, the underlying mortgages) are subject to caps or floors that limit the maximum change in interest rate during a specified period or over the life of the security. Because of the resetting of interest rates, adjustable rate securities are less likely than non-adjustable rate securities of comparable quality and maturity to increase significantly in value when market interest rates fall. LOWER RATED SECURITIES Certain Funds may invest some or all of their assets in securities rated below investment grade (that is, rated below BBB by Standard & Poor's or below Baa by Moody's) at the time of purchase, including securities in the lowest rating categories, and comparable unrated securities ("Lower Rated Securities"). A Fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase, although the Manager will monitor the investment to determine whether continued investment in the security will assist in meeting the Fund's investment objective. Lower Rated Securities generally provide higher yields, but are subject to greater credit and market risk, than higher quality fixed income securities. Lower Rated Securities are considered predominantly speculative with respect to the ability of the issuer to meet principal and interest payments. Achievement of the investment objective of a Fund investing in Lower Rated Securities may be more dependent on the Manager's own credit analysis than is the case with higher quality bonds. The market for Lower Rated Securities may be more severely affected than some other financial markets by economic recession or substantial interest rate increases, by changing public perceptions of this market or by legislation that limits the ability of certain categories of financial institutions to invest in these securities. In addition, the secondary market may be less liquid for Lower Rated Securities. This reduced liquidity at certain times may affect the values of these securities and may make the valuation and sale of these securities more difficult. Securities of below investment grade quality are commonly referred to as "junk bonds." Securities in the lowest rating categories may be in poor standing or in default. Securities in the lowest investment grade category (BBB or Baa) have some speculative characteristics. See Appendix B for more information concerning commercial paper and corporate debt ratings. BRADY BONDS Brady Bonds are securities created through the exchange of existing commercial bank loans to public and private entities in certain emerging markets for new bonds in connection with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings have been implemented in Mexico, Uruguay, Venezuela, Costa Rica, Argentina, Nigeria, the Philippines and other countries. Brady Bonds have been issued only recently, and for that reason do not have a long payment history. Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (but primarily the dollar) and are actively traded in over-the-counter secondary markets. Dollar-denominated, collateralized Brady Bonds, which may be fixed-rate bonds or floating-rate bonds, are generally collateralized in full as to principal by U.S. Treasury zero coupon bonds having the same maturity as the bonds. Brady Bonds are often viewed as having three or four valuation components: any collateralized repayment of principal at final maturity; any collateralized interest payments; the uncollateralized interest payments; and any uncollateralized repayment of principal at maturity (these uncollateralized amounts constituting the "residual risk"). In light of the residual risk of Brady bonds and the history of defaults of countries issuing Brady Bonds with respect to commercial bank loans by public and private entities, investments in Brady Bonds may be viewed as speculative. ZERO COUPON SECURITIES A Fund investing in "zero coupon" fixed income securities is required to accrue interest income on these securities at a fixed rate based on the initial purchase price and the length to maturity, but these securities do not pay interest in cash on a current basis. Each Fund is required to distribute the income on these securities to its shareholders as the income accrues, even though that Fund is not receiving the income in cash on a current basis. Thus, each Fund may have to sell other investments to obtain cash to make income distributions. The market value of zero coupon securities is often more volatile than that of non-zero coupon fixed income securities of comparable quality and maturity. Zero coupon securities include IO and PO strips. INDEXED SECURITIES Indexed Securities are securities the redemption values and/or the coupons of which are indexed to the prices of a specific instrument or statistic. Indexed securities typically, but not always, are debt securities or deposits whose value at maturity or coupon rate is determined by reference to other securities, securities indices, currencies, precious metals or other commodities, or other financial indicators. Gold-indexed securities, for example, typically provide for a maturity value that depends on the price of gold, resulting in a security whose price tends to rise and fall together with gold prices. Currency-indexed securities typically are short-term to intermediate-term debt securities whose maturity values or interest rates are determined by reference to the values of one or more specified foreign currencies, and may offer higher yields than U.S. dollar-denominated securities of equivalent issuers. Currency- indexed securities may be positively or negatively indexed; that is, their maturity value may increase when the specified currency value increases, resulting in a security that performs similarly to a foreign-denominated instrument, or their maturity value may decline when foreign currencies increase, resulting in a security whose price characteristics are similar to a put on the underlying currency. Currency-indexed securities may also have prices that depend on the values of a number of different foreign currencies relative to each other. The performance of indexed securities depends to a great extent on the performance of the security, currency, or other instrument to which they are indexed, and may also be influenced by interest rate changes in the U.S. and abroad. At the same time, indexed securities are subject to the credit risks associated with the issuer of the security, and their values may decline substantially if the issuer's creditworthiness deteriorates. Recent issuers of indexed securities have included banks, corporations, and certain U.S. government agencies. Indexed securities in which each Fund may invest include so-called "inverse floating obligations" or "residual interest bonds" on which the interest rates typically decline as short-term market interest rates increase and increase as short-term market rates decline. Such securities have the effect of providing a degree of investment leverage, since they will generally increase or decrease in value in response to changes in market interest rates at a rate which is a multiple of the rate at which fixed-rate long-term securities increase or decrease in response to such changes. As a result, the market values of such securities will generally be more volatile than the market values of fixed rate securities. FIRM COMMITMENTS A firm commitment agreement is an agreement with a bank or broker-dealer for the purchase of securities at an agreed-upon price on a specified future date. A Fund may enter into firm commitment agreements with such banks and broker-dealers with respect to any of the instruments eligible for purchase by the Fund. A Fund will only enter into firm commitment arrangements with banks and broker-dealers which the Manager determines present minimal credit risks. Each such Fund will maintain in a segregated account with its custodian cash, U.S. Government Securities or other liquid high grade debt obligations in an amount equal to the Fund's obligations under firm commitment agreements. LOANS, LOAN PARTICIPATIONS AND ASSIGNMENTS Certain Funds may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates (loans and loan participations), to suppliers of goods or services (trade claims or other receivables), or to other parties. Direct debt instruments are subject to a Fund's policies regarding the quality of debt securities. Purchasers of loans and other forms of direct indebtedness depend primarily upon the creditworthiness of the borrower for payment of principal and interest. Direct debt instruments may not be rated by any nationally recognized rating and yield could be adversely affected. Loans that are fully secured offer the Fund more protections than an unsecured loan in the event of non-payment of scheduled interest of principal. However, there is no assurance that the liquidation of collateral from a secured loan would satisfy the borrower's obligation, or that the collateral can be liquidated. Indebtedness of borrowers whose creditworthiness is poor involves substantially greater risks, and may be highly speculative. Borrowers that are in bankruptcy or restructuring may never pay off their indebtedness, or may pay only a small fraction of the amount owed. Direct indebtedness of emerging countries will also involve a risk that the governmental entities responsible for the repayment of the debt may be unable, or unwilling, to pay interest and repay principal when due. When investing in a loan participation, a Fund will typically have the right to receive payments only from the lender to the extent the lender receives payments from the borrower, and not from the borrower itself. Likewise, a Fund typically will be able to enforce its rights only through the lender, and not directly against the borrower. As a result, a Fund will assume the credit risk of both the borrower and the lender that is selling the participation. Investments in loans through direct assignment of a financial institution's interests with respect to a loan may involve additional risks to the Fund. For example, if a loan is foreclosed, a Fund could become part owner of any collateral, and would bear the costs and liabilities associated with owning and disposing of the collateral. In addition, it is conceivable that under emerging legal theories of lender liability, a Fund could be held liable as a co-lender. In the case of a loan participation, direct debt instruments may also involve a risk of insolvency of the lending bank or other intermediary. Direct debt instruments that are not in the form of securities may offer less legal protection to a Fund in the event of fraud or misrepresentation. In the absence of definitive regulatory guidance, a Fund may rely on the Manager's research to attempt to avoid situations where fraud or misrepresentation could adversely affect the fund. A loan is often administered by a bank or other financial institution that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. Unless, under the terms of the loan or other indebtedness, a Fund has direct recourse against the borrower, it may have to rely on the agent to apply appropriate credit remedies against a borrower. Direct indebtedness purchased by a Fund may include letters of credit, revolving credit facilities, or other standby financing commitments obligating the Fund to pay additional cash on demand. These commitments may have the effect of requiring the Fund to increase its investment in a borrower at a time when it would not otherwise have done so. A Fund will set aside appropriate liquid assets in a segregated custodial account to cover its potential obligations under standby financing commitments. REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS Certain Funds may enter into reverse repurchase agreements and dollar roll agreements with banks and brokers to enhance return. Reverse repurchase agreements involve sales by a Fund of portfolio assets concurrently with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. During the reverse repurchase agreement period, the Fund continues to receive principal and interest payments on these securities and also has the opportunity to earn a return on the collateral furnished by the counterparty to secure its obligation to redeliver the securities. Dollar rolls are transactions in which a Fund sells securities for delivery in the current month and simultaneously contracts to repurchase substantially similar (same type and coupon) securities on a specified future date. During the roll period, the Fund forgoes principal and interest paid on the securities. The Fund is compensated by the difference between the current sales price and the forward price for the future purchase (often referred to as the "drop") as well as by the interest earned on the cash proceeds of the initial sale. A Fund which makes such investments will establish segregated accounts with its custodian in which the Fund will maintain cash, U.S. Government Securities or other liquid high grade debt obligations equal in value to its obligations in respect of reverse repurchase agreements and dollar rolls. Reverse repurchase agreements and dollar rolls involve the risk that the market value of the securities retained by a Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase under the agreement. In the event the buyer of securities under a reverse repurchase agreement or dollar roll files for bankruptcy or becomes insolvent, a Fund's use of the proceeds of the agreement may be restricted pending a determination by the other party or its trustee or receiver whether to enforce the Fund's obligation to repurchase the securities. Reverse repurchase agreements and dollar rolls are not considered borrowings by a Fund for purposes of a Fund's fundamental investment restriction with respect to borrowings. ILLIQUID SECURITIES Each Fund may purchase "illiquid securities," i.e., securities which may not be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the Fund has valued the investment, which include securities whose disposition is restricted by securities laws, so long as no more than 15% of net assets would be invested in such illiquid securities. Each Fund currently intends to invest in accordance with the SEC staff view that repurchase agreements maturing in more than seven days are illiquid securities. The SEC staff has stated informally that it is of the view that over-the-counter options and securities serving as cover for over-the-counter options are illiquid securities. While the Trust does not agree with this view, it will operate in accordance with any relevant formal guidelines adopted by the SEC. In addition, the SEC staff considers equity swap contracts, caps, floors and collars to be illiquid securities. Consequently, while the staff maintains this position, the Fund will not enter into an equity swap contract or a reverse equity swap contract or purchase a cap, floor or collar if, as a result of the investment, the total value (i.e., marked-to-market value) of such investments (without regard to their notional amount) together with that of all other illiquid securities which the Fund owns would exceed 15% of the Fund's total assets. PURCHASE OF SHARES Shares of each Fund may be purchased directly from the Trust on any day when the New York Stock Exchange is open for business (a "business day"). The minimum for an initial investment in the Trust (which minimum investment may be allocated among one or more Funds) is $10,000,000, and the minimum for each subsequent investment is $250,000; provided, however, that, in the Manager's sole discretion, smaller initial and subsequent investments may be made if the investor is an employee of the Manager, or the Manager otherwise determines it is appropriate to permit such investments. The purchase price of a share of each Fund is (i) the net asset value next determined after a purchase order is received in good order plus (ii) a premium established from time to time by the Trust. The following table summarizes the maximum purchase premiums that each Fund may charge in connection with cash investments in such Funds: PURCHASE FUND PREMIUM Short-Term Income, Domestic Bond and NONE Foreign Funds Currency Hedged International Bond, Value Allocation, Fundamental Value, International Bond and Global Bond Funds 0.15% Core, Tobacco-Free Core, Growth Allocation and U.S. Sector Allocation Funds 0.17% Japan Fund and Core Emerging Country Debt Fund 0.40% Emerging Country Debt Fund 0.50% Global Hedged Equity Fund 0.60% Core II Secondaries, International Core and 0.75% Currency Hedged International Core Funds International Small Companies Fund 1.25% Emerging Markets Fund 1.60% The Manager will waive the purchase premium if, in the view of the Manager, there are minimal brokerage and transaction costs incurred in connection with the purchase. Normally, no purchase premium is charged with respect to in-kind purchases. In the case of in-kind purchases of each of the International Equity Funds (except the Global Hedged Equity Fund) involving transfers of large positions in markets where the costs of re- registration and/or other transfer expenses are high, the Fund may charge a purchase premium of .10% (.20% in the case of the Emerging Markets Fund). All purchase premiums are paid to and retained by the relevant Fund and are intended to cover brokerage and other expenses of the Fund arising in connection with the purchase. Shares of each Fund may be purchased either (i) in exchange for securities on deposit at The Depository Trust Company ("DTC") (or such other depository acceptable to the Manager), subject to the determination by the Manager that the securities to be exchanged are acceptable, (ii) in cash or (iii) by a combination of such securities and cash. In all cases, the Manager reserves the right to reject any particular investment. Securities accepted by the Manager in exchange for Fund shares will be valued as set forth under "Determination of Net Asset Value" (generally the last quoted sale price) as of the time of the next determination of net asset value after such acceptance. All dividends, subscription or other rights which are reflected in the market price of accepted securities at the time of valuation become the property of the relevant Fund and must be delivered to the Trust upon receipt by the investor from the issuer. A gain or loss for federal income tax purposes may be realized by investors subject to Federal income taxation upon the exchange, depending upon the investor's basis in the securities tendered. The Manager will not approve the acceptance of securities in exchange for Fund shares unless (1) the Manager, in its sole discretion, believes the securities are appropriate investments for the Fund; (2) the investor represents and agrees that all securities offered to the Fund are not subject to any restrictions upon their sale by the Fund under the Securities Act of 1933, or otherwise; and (3) the securities may be acquired under the investment restrictions applicable to the relevant Fund. Investors interested in purchases through exchange should telephone the Manager at (617) 330-7500, Attention: Shareholder Services. Investors should call the offices of the Trust before attempting to place an order for Trust shares. The Trust reserves the right at any time to reject an order. For purposes of calculating the purchase price of Trust shares, a purchase order is received by the Trust on the day that it is "in good order" and is accepted by the Trust. For a purchase order to be in "good order" on a particular day, the investor's consideration must be received before the relevant deadline on that day. If the investor makes a cash investment, the deadline for wiring Federal funds to the Trust is 2:00 p.m.; if the investor makes an investment in- kind, the investor's securities must be placed on deposit at DTC (or such other depository as is acceptable to the Manager) and 2:00 p.m. is the deadline for transferring those securities to the account designated by the transfer agent, Investors Bank & Trust Company, One Lincoln Plaza, Boston, Massachusetts 02205. Investors should be aware that approval of the securities to be used for purchase must be obtained from the Manager prior to this time. When the consideration is received by the Trust after the relevant deadline, the purchase order is not considered to be in good order and is required to be resubmitted on the following business day. With the prior consent of the Manager, in certain circumstances the Manager may, in its discretion, permit purchases based on receiving adequate written assurances that Federal Funds or securities, as the case may be, will be delivered to the Trust by 2:00 p.m. on the fourth business day after such assurances are received. The International Core Fund may be available through a broker or dealer who may charge a transaction fee for purchases and redemptions of that Fund's shares. If shares of the International Core Fund are purchased directly from the Trust without the intervention of a broker or dealer, no such charge will be imposed. PURCHASE PROCEDURES: (a) Purchase Order Form: The Trust reserves the right to reject any order for Trust shares. Therefore, investors must submit an application to the Manager and obtain the Manager's acceptance of the order before it will be considered "in good order." A Purchase Order Form may be obtained by calling the Trust at (617) 330-7500, Attention: Shareholder Services. The Order Form may be submitted to the Manager (i) By Mail to Grantham, Mayo, Van Otterloo & Co., 40 Rowes Wharf, Boston, MA 02110; Attention: Shareholder Services, or (ii) By Facsimile to (617) 439-4192; Attention: Shareholder Services. (b) Acceptance of Order: No purchase order is in "good order" until it has been accepted by the Manager. Investors should call the Trust (at (617) 330-7500, Attention: Shareholder Services) before attempting to place an order for Trust shares. If a Purchase Order Form is mailed or faxed to the Trust without first contacting Shareholder Services, investors should not consider their order acknowledged until they have received notification from the Trust or have confirmed receipt of the order by contacting Shareholder Services. (c) Payment: All Federal funds must be transmitted to Investors Bank & Trust Company for the account of the specific Fund of GMO Trust as set forth below: Core Fund Account No. 4001 Tobacco-Free Core Fund Account No. 4008 Value Allocation Fund Account No. 4004 Growth Allocation Fund Account No. 4002 U.S. Sector Allocation Fund Account No. 4014 Core II Secondaries Fund Account No. 4012 Fundamental Value Fund Account No. 4009 International Core Fund Account No. 4006 Currency Hedged International Core Fund Account No. 4028 International Small Companies Fund Account No. 4010 Japan Fund Account No. 4007 Emerging Markets Fund Account No. 4018 Global Hedged Equity Fund Account No. 4024 Domestic Bond Fund Account No. 4025 Short-Term Income Fund Account No. 4005 International Bond Fund Account No. 4015 Currency Hedged International Bond Fund Account No. 4026 Global Bond Fund Account No. 4029 Emerging Country Debt Fund Account No. 4021 Core Emerging Country Debt Fund Account No. 4027 Foreign Fund Account No. 4032 "Federal funds" are monies credited to Investors Bank & Trust Company's account with the Federal Reserve Bank of Boston. DO NOT SEND CASH, CHECKS OR SECURITIES DIRECTLY TO THE TRUST OR TO THE MANAGER. Wire transfer and mailing instructions are contained on the Purchase Order Form which can be obtained from the Manager. Purchases will be made in full and fractional shares of each Fund calculated to three decimal places. The Trust will send to shareholders written confirmation (including a statement of shares owned) at the time of each transaction. The Manager may attempt to process orders for Trust shares that are submitted less formally than as described above but, in such cases, the investor should carefully review confirmations sent by the Trust to verify that the order was properly executed. The Trust and the Manager can not be responsible for failure to execute orders or improperly executing orders that are not submitted in accordance with these procedures. REDEMPTION OF SHARES Shares of each Fund may be redeemed on any business day in cash or in kind. The redemption price is the net asset value per share next determined after receipt of the redemption request in "good order" less any applicable redemption fee. With the exception of the redemption fees for those Funds set forth in the table below, there is no redemption fee for cash redemptions of shares of any of the Funds: Redemption Fee (as a percentage of Fund amount redeemed) Core II Secondaries Fund 0.75% International Small Companies Fund 0.75% Japan Fund 0.70% Emerging Markets Fund 0.40%* Global Hedged Equity Fund 1.40% Emerging Country Debt Fund 0.25%** * Applies only to shares acquired on or after June 1, 1995 (including shares acquired through the reinvestment of dividends and other distributions after such date). ** Applies only to shares acquired on or after July 1, 1995 (including shares acquired through the reinvestment of dividends and other distributions after such date). In addition, the Manager may waive the Redemption Fees stated above if there are minimal brokerage and transaction costs incurred in connection with the redemption. To the extent that shares are redeemed at a time when other shares of the same Fund are being purchased, the Manager will treat the redemption (up to the amount being concurrently purchased) as involving minimal brokerage and transaction costs and will charge any redemption fee only with respect to the excess, if any, of the amount of the redemption over the amount of the concurrent purchase. If there is more than one redemption at the time of a concurrent purchase, each of the redeeming shareholders will share, pro rata, in the reduction in redemption fee caused by the concurrent purchase. There is no redemption fee on redemptions in-kind. Redemption fees will be retained by the relevant Fund and are intended to cover brokerage and other expenses of the Fund arising out of redemptions. If the Manager determines, in its sole discretion, that it would be detrimental to the best interests of the remaining shareholders of a Fund to make payment wholly or partly in cash, the Fund may pay the redemption price in whole or in part by a distribution in kind of securities held by the Fund in lieu of cash. Securities used to redeem Fund shares in kind will be valued in accordance with the relevant Fund's procedures for valuation described under "Determination of Net Asset Value." Securities distributed by a Fund in kind will be selected by the Manager in light of the Fund's objective and will not generally represent a pro rata distribution of each security held in the Fund's portfolio. Any in-kind redemptions will be of readily marketable securities to the extent available. Investors may incur brokerage charges on the sale of any such securities so received in payment of redemptions. Payment on redemption will be made as promptly as possible and in any event within seven days after the request for redemption is received by the Trust in good order. A redemption request is in good order if it includes the exact name in which shares are registered, the investor's account number and the number of shares or the dollar amount of shares to be redeemed and if it is signed exactly in accordance with the form of registration. In addition, for a redemption request to be in "good order" on a particular day, the investor's request must be received by the Manager by 4:15 p.m. on a business day. When a redemption request is received after 4:15 p.m., the redemption request will not be considered to be in "good order" and is required to be resubmitted on the following business day. Persons acting in a fiduciary capacity, or on behalf of a corporation, partnership or trust must specify, in full, the capacity in which they are acting. The redemption request can be considered "received" by the Trust only after (i) it is mailed or faxed to the Trust (at the address or facsimile number set forth above for purchase orders), and (ii) the investor has confirmed receipt of the request by calling (617) 330-7500, Attention: Shareholder Services. In-kind distributions will be transferred and delivered as directed by the investor. Cash payments will be made by transfer of Federal funds for payment into the investor's account. When opening an account with the Trust, shareholders will be required to designate the account(s) to which funds or securities may be transferred upon redemption. Designation of additional accounts and any change in the accounts originally designated must be made in writing. Each Fund may suspend the right of redemption and may postpone payment for more than seven days when the New York Stock Exchange is closed for other than weekends or holidays, or if permitted by the rules of the Securities and Exchange Commission during periods when trading on the Exchange is restricted or during an emergency which makes it impracticable for the Fund to dispose of its securities or to fairly determine the value of the net assets of the Fund, or during any other period permitted by the Securities and Exchange Commission for the protection of investors. Because the International Funds each hold portfolio securities listed on foreign exchanges which may trade on days on which the New York Stock Exchange is closed, the net asset value of such Funds' shares may be significantly affected on days when shareholders have no access to such Funds. DETERMINATION OF NET ASSET VALUE Except on days during which no security is tendered for redemption and no order to purchase or sell such security is received by the relevant Fund, the net asset value of a share is determined for each Fund once on each day on which the New York Stock Exchange is open as of 4:15 p.m., New York City Time, by dividing the total market value of the Fund's portfolio investments and other assets, less any liabilities, by the total outstanding shares of the Fund. Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last quoted sale price on each business day, or, if there is no such reported sale, at the most recent quoted bid price. Price information on listed securities is generally taken from the closing price on the exchange where the security is primarily traded. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price, except that debt obligations with sixty days or less remaining until maturity may be valued at their amortized cost. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees or persons acting at their direction. The values of foreign securities quoted in foreign currencies are translated into U.S. dollars at current exchange rates or at such other rates as the Trustees may determine in computing net asset value. Debt securities with a remaining maturity of 60 days or less will be valued at amortized cost, unless circumstances dictate otherwise. Circumstances may dictate otherwise, among other times, when the issuer's creditworthiness has become impaired. Because of time zone differences, foreign exchanges and securities markets will usually be closed prior to the time of the closing of the New York Stock Exchange and values of foreign options and foreign securities will be determined as of the earlier closing of such exchanges and securities markets. However, events affecting the values of such foreign securities may occasionally occur between the earlier closings of such exchanges and securities markets and the closing of the New York Stock Exchange which will not be reflected in the computation of the net asset value of the International Funds. If an event materially affecting the value of such foreign securities occurs during such period, then such securities will be valued at fair value as determined in good faith by the Trustees or persons acting at their direction. Because foreign securities, options on foreign securities and foreign futures are quoted in foreign currencies, fluctuations in the value of such currencies in relation to the U.S. dollar will affect the net asset value of shares of the International Funds even though there has not been any change in the values of such securities and options, measured in terms of the foreign currencies in which they are denominated. DISTRIBUTIONS Each Fund intends to pay out as dividends substantially all of its net investment income (which comes from dividends and interest it receives from its investments and net short-term capital gains). For these purposes and for federal income tax purposes, a portion of the premiums from certain expired call or put options written by a Fund, net gains from certain closing purchase and sale transactions with respect to such options and a portion of net gains from other options and futures transactions are treated as short-term capital gain. Each Fund also intends to distribute substantially all of its net long-term capital gains, if any, after giving effect to any available capital loss carryover. With the exception of the International Funds, each Fund's present policy is to declare and pay distributions of its dividends and interest quarterly. The policy of each International Fund is to declare and pay distributions of its dividends, interest and foreign currency gains semi-annually. Each Fund also intends to distribute net short-term capital gains and net long-term gains at least annually. All dividends and/or distributions will be paid in shares of the relevant Fund, at net asset value, unless the shareholder elects to receive cash. There is no purchase premium on reinvested dividends or distributions. Shareholders may make this election by marking the appropriate box on the Purchase Order Form or by writing to the Trust. TAXES Each Fund is treated as a separate taxable entity for federal income tax purposes. Each Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. So long as a Fund so qualifies, the Fund itself will not pay federal income tax on the amount distributed. Fund distributions derived from interest, dividends and certain other income, including in general short-term capital gains, will be taxable as ordinary income to shareholders subject to federal income tax whether received in cash or reinvested shares. Designated distributions of any long-term capital gains whether received in cash or reinvested shares are taxable as such to shareholders subject to federal income tax, regardless of how long a shareholder may have owned shares in the Fund. Any loss realized upon a taxable disposition of shares held for six months or less will be treated as long-term capital loss to the extent of any long-term capital gain distributions received by a shareholder with respect to those shares. A distribution paid to shareholders by a Fund in January of a year generally is deemed to have been received by shareholders on December 31 of the preceding year, if the distribution was declared and payable to shareholders of record on a date in October, November or December of that preceding year. The Trust will provide federal tax information annually, including information about dividends and distributions paid during the preceding year. The back-up withholding rules do not apply to tax exempt entities so long as each such entity furnishes the Trust with an appropriate certification. However, other shareholders are subject to back-up withholding at a rate of 31% on all distributions of net investment income and capital gain, whether received in cash or reinvested in shares of the relevant Fund, and on the amount of the proceeds of any redemption of Fund shares paid or credited to any shareholder account for which an incorrect or no taxpayer identification number has been provided, where appropriate certification has not been provided for a foreign shareholder, or where the Trust is notified that the shareholder has underreported income in the past (or the shareholder fails to certify that he is not subject to such withholding). The foregoing is a general summary of the federal income tax consequences for shareholders who are U.S. citizens, residents or domestic corporations. Shareholders should consult their own tax advisors about the tax consequences of an investment in a Fund in light of each shareholder's particular tax situation. Shareholders should also consult their own tax advisors about consequences under foreign, state, local or other applicable tax laws. WITHHOLDING ON DISTRIBUTIONS TO FOREIGN INVESTORS Dividend distributions (including distributions derived from short-term capital gains) are in general subject to a U.S. withholding tax of 31% when paid to a nonresident alien individual, foreign estate or trust, a foreign corporation, or a foreign partnership ("foreign shareholder"). Persons who are resident in a country, such as the U.K., that has an income tax treaty with the U.S. may be eligible for a reduced withholding rate (upon filing of appropriate forms), and are urged to consult their tax advisors regarding the applicability and effect of such a treaty. Distributions of net long-term capital gains to a foreign shareholder, and any gain realized upon the sale of Fund shares by such a shareholder will ordinarily not be subject to U.S. taxation, unless the recipient or seller is a nonresident alien individual who is present in the United States for more than 182 days during the taxable year. However, foreign shareholders with respect to whom income from a Fund is "effectively connected" with a U.S. trade or business carried on by such shareholder will in general be subject to U.S. federal income tax on the income derived from the Fund at the graduated rates applicable to U.S. citizens, residents or domestic corporations, whether received in cash or reinvested in shares, and, in the case of a foreign corporation, may also be subject to a branch profits tax. Again, foreign shareholders who are resident in a country with an income tax treaty with the United States may obtain different tax results, and are urged to consult their tax advisors. FOREIGN TAX CREDITS If, at the end of the fiscal year, more than 50% of the total assets of any Fund is represented by stock of foreign corporations, the Fund intends to make an election with respect to the relevant Fund which allows shareholders whose income from the Fund is subject to U.S. taxation at the graduated rates applicable to U.S. citizens, residents or domestic corporations to claim a foreign tax credit or deduction (but not both) on their U.S. income tax return. In such case, the amounts of foreign income taxes paid by the Fund would be treated as additional income to Fund shareholders from non-U.S. sources and as foreign taxes paid by Fund shareholders. Investors should consult their tax advisors for further information relating to the foreign tax credit and deduction, which are subject to certain restrictions and limitations. Shareholders of any of the International Funds whose income from the Fund is not subject to U.S. taxation at the graduated rates applicable to U.S. citizens, residents or domestic corporations may receive substantially different tax treatment of distributions by the relevant Fund, and may be disadvantaged as a result of the election described in this paragraph. LOSS OF REGULATED INVESTMENT COMPANY STATUS A Fund may experience particular difficulty qualifying as a regulated investment company in the case of highly unusual market movements, in the case of high redemption levels and/or during the first year of its operations. If the Fund does not qualify for taxation as a regulated investment company for any taxable year, the Fund's income will be taxed at the Fund level at regular corporate rates, and all distributions from earnings and profits, including distributions of net long-term capital gains, will be taxable to shareholders as ordinary income and subject to withholding in the case of non-U.S. shareholders. In addition, in order to requalify for taxation as a regulated investment company, the Fund may be required to recognize unrealized gains, pay taxes on such gains, and make certain distributions. MANAGEMENT OF THE TRUST Each Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co., 40 Rowes Wharf, Boston, Massachusetts 02110 (the "Manager") which provides investment advisory services to a substantial number of institutional and other investors, including one other registered investment company. Each of the following four general partners holds a greater than 5% interest in the Manager: R. Jeremy Grantham, Richard A. Mayo, Eyk H.A. Van Otterloo and Kingsley Durant. Under separate Management Contracts with the Trust, the Manager selects and reviews each Fund's investments and provides executive and other personnel for the management of the Trust. Pursuant to the Trust's Agreement and Declaration of Trust, the Board of Trustees supervises the affairs of the Trust as conducted by the Manager. In the event that the Manager ceases to be the manager of any Fund, the right of the Trust to use the identifying name "GMO" may be withdrawn. The Manager has entered into a Consulting Agreement (the "Consulting Agreement") with Dancing Elephant, Ltd., 1936 University Avenue, Berkeley, California 94704 (the "Consultant), with respect to the management of the portfolio of the Emerging Markets Fund. The Consultant is wholly-owned by Mr. Arjun Divecha. Under the Consulting Agreement, the Manager pays the Consultant a monthly fee at an annual rate equal to the greater of 0.50% of the Fund's average daily net assets or $500,000. The Consultant may from time to time waive all or a portion of its fee. Payments made by the Manager to the Consultant will not affect the amounts payable by the Fund to the Manager or the Fund's expense ratio. Each Management Contract provides for payment to the Manager of a monthly fee at the stated annual rates set forth under Schedule of Fees and Expenses. While the fee paid to the Manager by each of the Fundamental Value Fund, the International Core Fund, the Currency Hedged International Core Fund, the Foreign Fund, the International Small Companies Fund, the Japan Fund and the Emerging Markets Fund is higher than that paid by most funds, each is comparable to the fees paid by many funds with similar investment objectives. In addition, with respect to each Fund, the Manager has voluntarily agreed to waive its fee and to bear certain expenses until further notice in order to limit each Fund's annual expenses to specified limits (with certain exclusions). These limits and the terms applicable to them are described under Schedule of Fees and Expenses. During the fiscal year ended February 28, 1995, the Manager received, as compensation for advisory services rendered in such year (after waiver), the percentages of each Fund's average net assets as set forth below: Fund % of Average Net Assets Core Fund 0.45% Tobacco-Free Core Fund 0.23% Value Allocation Fund 0.56% Growth Allocation Fund 0.42% U.S. Sector Allocation Fund 0.40% Core II Secondaries Fund 0.39% Fundamental Value Fund 0.68% International Core Fund 0.61% International Small Companies Fund 0.47% Japan Fund 0.72% Emerging Markets Fund 1.00% Global Hedged Equity Fund 0.62% Domestic Bond Fund 0.19% Short-Term Income Fund 0.06% International Bond Fund 0.19% Currency Hedged International Bond Fund 0.31% Emerging Country Debt Fund 0.42% Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Ms. Jody Shuman Meslin are primarily responsible for the day-to-day management of the portfolio of each of the Core Fund, the Tobacco-Free Core Fund, the Growth Allocation Fund, the U.S. Sector Allocation Fund, and the Core II Secondaries Fund. Each has served in this capacity for more than five years. Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for the day-to-day management of the Fixed Income Funds. Each of Messrs. Nemerever and Cooper has served in this capacity since the inception of all of these Funds except the Short-Term Income Fund. Messrs. Nemerever and Cooper have served as the managers of the Short-Term Income Fund since 1993. Prior to 1993, the Short-Term Income Fund was managed by Mr. Robert Brokaw. Mr. Richard A. Mayo has been primarily responsible for the day-to-day management of the portfolio of the Fundamental Value Fund since the inception of the Fund. Mr. Mayo and Mr. Christopher Darnell have been primarily responsible for the day-to-day management of the portfolio of the Value Allocation Fund since the inception of the Fund. Mr. Grantham, Mr. Forrest Berkley and Ms. Doris Chu have been primarily responsible for the day-to-day management of the portfolio of each of the Currency Hedged International Core Fund, the International Small Companies Fund, the Japan Fund and the Global Hedged Equity Fund since inception of the Funds and have served as managers of the International Core Fund for the last five years. Mr. Arjun Bhagwan Divecha has been primarily responsible for the day-to-day management of the portfolio of the Emerging Markets Fund since the inception of the Fund. Day-to-day management of the portfolio of the Foreign Fund is the responsibility of a committee and no person or persons is primarily responsible for making recommendations to that committee. Mr. Grantham and Mr. Mayo are both founding partners of the Manager and have been employed by the Manager in equity and fixed-income portfolio management since its inception in 1977. Mr. Grantham serves as President - Domestic Quantitative and Mr. Mayo serves as President - Domestic Active of the Trust. Ms. Meslin has been employed by the Manager principally in equity portfolio management for more than ten years. Mr. Darnell has been employed by the Manager since 1979 and has been involved in equity portfolio management for more than ten years. Mr. Berkley and Ms. Chu have each been employed by the Manager for more than eight years and have each been involved in portfolio management (principally of international equities) for more than six years. Mr. Nemerever and Mr. Cooper have been employed by the Manager in fixed-income portfolio management since October, 1993. For the five years prior to October, 1993, Mr. Nemerever was employed by Boston International Advisors and Fidelity Management Trust Company in fixed-income portfolio management. For the five years prior to October, 1993, Mr. Cooper was employed by Boston International Advisors, Goldman Sachs Asset Management and Western Asset Management in fixed-income portfolio management. Mr. Divecha is the sole shareholder and President of the Consultant which he began to organize in September 1993. From 1981 until September 1993, Mr. Divecha was employed by BARRA and during this period he was involved in equity portfolio management for more than five years. ORGANIZATION AND CAPITALIZATION OF THE TRUST The Trust was established on June 24, 1985 as a business trust under Massachusetts law. The Trust has an unlimited authorized number of shares of beneficial interest which may, without shareholder approval, be divided into an unlimited number of series of such shares, and which are presently divided into twenty-four series of shares: one for each Fund, one for the Pelican Fund and one for each of the REIT Fund and the Conservative Equity Fund which are both currently inactive. All shares of all series are entitled to vote at any meetings of shareholders. The Trust does not generally hold annual meetings of shareholders and will do so only when required by law. Matters submitted to shareholder vote must be approved by each Fund separately except (i) when required by the 1940 Act shares shall be voted together as a single class and (ii) when the Trustees have determined that the matter does not affect a Fund, then only shareholders of the Fund(s) affected shall be entitled to vote on the matter. Shares are freely transferable, are entitled to dividends as declared by the Trustees, and, in liquidation of the Trust, are entitled to receive the net assets of their Fund, but not of any other Fund. Shareholders holding a majority of the outstanding shares of all series may remove Trustees from office by votes cast in person or by proxy at a meeting of shareholders or by written consent. On October 13, 1995, the following shareholders held greater than 25% of the outstanding shares of the series noted below: Fund Shareholders Tobacco-Free Core Fund Dewitt Wallace - Reader's Digest Fund, Inc.; Lila Wallace - Reader's Digest Fund, Inc. U.S. Sector Allocation Fund John D. MacArthur & Catherine T. MacArthur Foundation Fundamental Value Fund Yale University; Leland Stanford Junior University II Japan Fund International Monetary Staff Retirement Fund; Brown University Domestic Bond Fund Bankers Trust Company as Trustee, GTE Service Corp. Pension Trust; Bost & Co./ Bell Atlantic Short-Term Income Fund MJH Foundation Currency Hedged Bankers Trust Company as International Bond Fund Trustee, GTE Service Pension Trust Global Hedged Equity Fund Bankers Trust Company as Trustee, GTE Service Corp. Pension Trust As a result, such shareholders may be deemed to "control" their respective series as such term is defined in the 1940 Act. Shareholders could, under certain circumstances, be held personally liable for the obligations of the Trust. However, the risk of a shareholder incurring financial loss on account of that liability is considered remote since it may arise only in very limited circumstances. SHAREHOLDER INQUIRIES Shareholders may direct inquiries to the Trust c/o Grantham, Mayo, Van Otterloo & Co., 40 Rowes Wharf, Boston, MA 02110 (1-617-330-7500) APPENDIX A RISKS AND LIMITATIONS OF OPTIONS, FUTURES AND SWAPS Limitations on the Use of Options and Futures Portfolio Strategies. As noted in "Descriptions and Risks of Fund Investment Practices--Futures and Options" above, the Funds may use futures contracts and related options for hedging and, in some circumstances, for risk management or investment but not for speculation. Thus, except when used for risk management or investment, each such Fund's long futures contract positions (less its short positions) together with the Fund's cash (i.e., equity or fixed income) positions will not exceed the Fund's total net assets. The Funds' ability to engage in the options and futures strategies described above will depend on the availability of liquid markets in such instruments. Markets in options and futures with respect to currencies are relatively new and still developing. It is impossible to predict the amount of trading interest that may exist in various types of options or futures. Therefore no assurance can be given that a Fund will be able to utilize these instruments effectively for the purposes set forth above. Furthermore, each Fund's ability to engage in options and futures transactions may be limited by tax considerations. Risk Factors in Options Transactions. The option writer has no control over when the underlying securities or futures contract must be sold, in the case of a call option, or purchased, in the case of a put option, since the writer may be assigned an exercise notice at any time prior to the termination of the obligation. If an option expires unexercised, the writer realizes a gain in the amount of the premium. Such a gain, of course, may, in the case of a covered call option, be offset by a decline in the market value of the underlying security or futures contract during the option period. If a call option is exercised, the writer realizes a gain or loss from the sale of the underlying security or futures contract. If a put option is exercised, the writer must fulfill the obligation to purchase the underlying security or futures contract at the exercise price, which will usually exceed the then market value of the underlying security or futures contract. An exchange-traded option may be closed out only on a national securities exchange ("Exchange") which generally provides a liquid secondary market for an option of the same series. An over-the-counter option may be closed out only with the other party to the option transaction. If a liquid secondary market for an exchange-traded option does not exist, it might not be possible to effect a closing transaction with respect to a particular option with the result that the Fund holding the option would have to exercise the option in order to realize any profit. For example, in the case of a written call option, if the Fund is unable to effect a closing purchase transaction in a secondary market (in the case of a listed option) or with the purchaser of the option (in the case of an over-the-counter-option), the Fund will not be able to sell the underlying security (or futures contract) until the option expires or it delivers the underlying security (or futures contract) upon exercise. Reasons for the absence of a liquid secondary market on an Exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an Exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities; (iv) unusual or unforeseen circumstances may interrupt normal operations on an Exchange; (v) the facilities of an Exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume; or (vi) one or more Exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that Exchange (or in that class or series of options) would cease to exist, although outstanding options on that Exchange that had been issued by the Options Clearing Corporation as a result of trades on that Exchange should continue to be exercisable in accordance with their terms. The Exchanges have established limitations governing the maximum number of options which may be written by an investor or group of investors acting in concert. It is possible that the Funds, the Manager and other clients of the Manager may be considered to be such a group. These position limits may restrict a Fund's ability to purchase or sell options on a particular security. The amount of risk a Fund assumes when it purchases an option is the premium paid for the option plus related transaction costs. In addition to the correlation risks discussed below, the purchase of an option also entails the risk that changes in the value of the underlying security or futures contract will not be fully reflected in the value of the option purchased. Risk Factors in Futures Transactions. Investment in futures contracts involves risk. If the futures are used for hedging, some of that risk may be caused by an imperfect correlation between movements in the price of the futures contract and the price of the security or currency being hedged. The correlation is higher between price movements of futures contracts and the instrument underlying that futures contract. The correlation is lower when futures are used to hedge securities other than such underlying instrument, such as when a futures contract on an index of securities is used to hedge a single security, a futures contract on one security (e.g., U.S. Treasury bonds) is used to hedge a different security (e.g., a mortgage-backed security) or when a futures contract in one currency (e.g., the German Mark) is used to hedge a security denominated in another currency (e.g., the Spanish Peseta). In the event of an imperfect correlation between a futures position and a portfolio position (or anticipated position) which is intended to be protected, the desired protection may not be obtained and a Fund may be exposed to risk of loss. In addition, it is not always possible to hedge fully or perfectly against currency fluctuations affecting the value of the securities denominated in foreign currencies because the value of such securities also is likely to fluctuate as a result of independent factors not related to currency fluctuations. The risk of imperfect correlation generally tends to diminish as the maturity date of the futures contract approaches. A hedge will not be fully effective where there is such imperfect correlation. To compensate for imperfect correlations, a Fund may purchase or sell futures contracts in a greater amount than the hedged securities if the volatility of the hedged securities is historically greater than the volatility of the futures contracts. Conversely, a Fund may purchase or sell fewer contracts if the volatility of the price of the hedged securities is historically less than that of the futures contract. As noted in the Prospectus, a Fund may also purchase futures contracts (or options thereon) as an anticipatory hedge against a possible increase in the price of currency in which is denominated the securities the Fund anticipates purchasing. In such instances, it is possible that the currency may instead decline. If the Fund does not then invest in such securities because of concern as to possible further market and/or currency decline or for other reasons, the Fund may realize a loss on the futures contract that is not offset by a reduction in the price of the securities purchased. The liquidity of a secondary market in a futures contract may be adversely affected by "daily price fluctuation limits" established by commodity exchanges which limit the amount of fluctuation in a futures contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open futures positions. Prices have in the past exceeded the daily limit on a number of consecutive trading days. Short positions in index futures may be closed out only by entering into a futures contract purchase on the futures exchange on which the index futures are traded. The successful use of transactions in futures and related options for hedging and risk management also depends on the ability of the Manager to forecast correctly the direction and extent of exchange rate, interest rate and stock price movements within a given time frame. For example, to the extent interest rates remain stable during the period in which a futures contract or option is held by a Fund investing in fixed income securities (or such rates move in a direction opposite to that anticipated), the Fund may realize a loss on the futures transaction which is not fully or partially offset by an increase in the value of its portfolio securities. As a result, the Fund's total return for such period may be less than if it had not engaged in the hedging transaction. Unlike trading on domestic commodity exchanges, trading on foreign commodity exchanges is not regulated by the CFTC and may be subject to greater risks than trading on domestic exchanges. For example, some foreign exchanges may be principal markets so that no common clearing facility exists and a trader may look only to the broker for performance of the contract. In addition, unless a Fund hedges against fluctuations in the exchange rate between the U.S. dollar and the currencies in which trading is done on foreign exchanges, any profits that a Fund might realized in trading could be eliminated by adverse changes in the exchange rate, or the Fund could incur losses as a result of those changes. Risk Factors in Swap Contracts, OTC Options and other Two-Party Contracts. A Fund may only close out a swap, contract for differences, cap floor or collar or OTC option, with the particular counterparty. Also, if the counterparty defaults, a Fund will have contractual remedies pursuant to the agreement related to the transaction, but there is no assurance that contract counterparties will be able to meet their obligations pursuant to such contracts or that, in the event of default, a Fund will succeed in pursuing contractual remedies. The Fund thus assumes the risk that it may be delayed or prevented from obtaining payments owed to it pursuant to swap contracts. The Manager will closely monitor subject to the oversight of the Trustees, the creditworthiness of contract counterparties and a Fund will not enter into any swaps, caps, floors or collars, unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated at least A by Moody's Investors Service or Standard and Poor's Corporation at the time of entering into such transaction or if the counterparty has comparable credit as determined by the Manager. However, the credit of the counterparty may be adversely affected by larger-than-average volatility in the markets, even if the counterparty's net market exposure is small relative to its capital. The management of caps, floors, collars and swaps may involve certain difficulties because the characteristics of many derivatives have not been observed under all market conditions or through a full market cycle. Additional Regulatory Limitations on the Use of Futures and Related Options, Interest Rate Floors, Caps and Collars and Interest Rate and Currency Swap Contracts. In accordance with CFTC regulations, investments by any Fund as provided in the Prospectus in futures contracts and related options for purposes other than bona fide hedging are limited such that the aggregate amount that a Fund may commit to initial margin on such contracts or premiums on such options may not exceed 5% of that Fund's net assets. The Manager and the Trust do not believe that the Fund's respective obligations under equity swap contracts, reverse equity swap contracts or Index Futures are senior securities and, accordingly, the Fund will not treat them as being subject to its borrowing restrictions. However, the net amount of the excess, if any, of the Fund's obligations over its entitlements with respect to each equity swap contract will be accrued on a daily basis and an amount of cash, U.S. Government Securities or other high grade debt obligations having an aggregate market value at least equal to the accrued excess will be maintained in a segregated account by the Fund's custodian. Likewise, when a Fund takes a short position with respect to an Index Futures contract the position must be covered or the Fund must maintain at all times while that position is held by the Fund, cash, U.S. government securities or other high grade debt obligations in a segregated account with its custodian, in an amount which, together with the initial margin deposit on the futures contract, is equal to the current delivery or cash settlement value. The use of unsegregated futures contracts, related written options, interest rate floors, caps and collars and interest rate and currency swap contracts for risk management by a Fund permitted to engage in any or all of such practices is limited to no more than 10% of a Fund's total net assets when aggregated with such Fund's traditional borrowings in accordance with SEC pronouncements. This 10% limitation applies to the face amount of unsegregated futures contracts and related options and to the amount of a Fund's net payment obligation that is not segregated against in the case of interest rate floors, caps and collars and interest rate and currency swap contracts. APPENDIX B COMMERCIAL PAPER AND CORPORATE DEBT RATINGS COMMERCIAL PAPER RATINGS Commercial paper ratings of Standard & Poor's Corporation ("Standard & Poor's") are current assessments of the likelihood of timely payment of debts having original maturities of no more than 365 days. Commercial paper rated A-1 by Standard & Poor's indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted A-1+. Commercial paper rated A-2 by Standard and Poor's indicates that capacity for timely payment on issues is strong. However, the relative degree of safety is not as high as for issues designated A-1. Commercial paper rated A-3 indicates capacity for timely payment. It is, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. The rating Prime-1 is the highest commercial paper rating assigned by Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or related supporting institutions) are considered to have a superior capacity for repayment of short-term promissory obligations. Issuers rated Prime-2 (or related supporting institutions) have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics of Prime-1 rated issuers, but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variations. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternative liquidity is maintained. Issuers rated Prime-3 have an acceptable capacity for repayment of short-term promissory obligations. The effect of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and the requirement of relatively high financial leverage. Adequate alternate liquidity is maintained. CORPORATE DEBT RATINGS Standard & Poor's Corporation. A Standard & Poor's corporate debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. The following is a summary of the ratings used by Standard & Poor's for corporate debt: AAA - This is the highest rating assigned by Standard & Poor's to a debt obligation and indicates an extremely strong capacity to pay interest and repay principal. AA - Bonds rated AA also qualify as high quality debt obligations. Capacity to pay interest and repay principal is very strong, and in the majority of instances they differ from AAA issues only in small degree. A - Bonds rated A have a 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. 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 repay principal and pay interest for bonds in this category than for bonds in higher rated categories. BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. C - The rating C is reserved for income bonds on which no interest is being paid. D - Bonds rated D are in default, and payment of interest and/or repayment of principal is in arrears. 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. Moody's Investors Service, Inc. The following is a summary of the ratings used by Moody's Investor Services, Inc. for corporate debt: AAA - Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." 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 that are rated Aa are judged to be high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than in Aaa securities.1 A - Bonds that 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 that suggest a susceptibility to impairment sometime in the future.1 BAA - Bonds that 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; 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. Should no rating be assigned by Moody's, 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 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 redemption; or for other reasons. Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes possess the strongest investment attributes are designated by the symbols 1Aa1, A1, Baa1, and B1. GRANTHAM, MAYO, VAN OTTERLOO & CO. 40 ROWES WHARF, BOSTON, MA 02110 (617) 330-7500 GMO TRUST STATEMENT OF ADDITIONAL INFORMATION February 29, 1996 This Statement of Additional Information is not a prospectus. This Statement of Additional Information relates to the Prospectus dated February 29, 1996, as amended from time to time and should be read in conjunction therewith. A copy of the Prospectus may be obtained from GMO Trust, 40 Rowes Wharf, Boston, Massachusetts 02110.
Table of Contents Caption Page INVESTMENT OBJECTIVE AND POLICIES.................................................................................1 MISCELLANEOUS INVESTMENT PRACTICES................................................................................1 INVESTMENT RESTRICTIONS...........................................................................................2 INCOME, DIVIDENDS, DISTRIBUTIONS AND TAX STATUS...................................................................5 MANAGEMENT OF THE TRUST...........................................................................................7 INVESTMENT ADVISORY AND OTHER SERVICES............................................................................8 PORTFOLIO TRANSACTIONS...........................................................................................13 DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES.................................................................15 FINANCIAL STATEMENTS.............................................................................................26
INVESTMENT OBJECTIVE AND POLICIES The investment objectives and policies of each Fund are described in the Prospectus. Unless otherwise indicated in the Prospectus or this Statement of Additional Information, the investment objective and policies of the Funds may be changed without shareholder approval. MISCELLANEOUS INVESTMENT PRACTICES Index Futures. As stated in the Prospectus under the heading "Descriptions and Risks of Fund Investment Practices -- Futures and Options," each of the Funds may purchase futures contracts on various securities indices ("Index Futures"). As indicated in the Prospectus, an Index Future is a contract to buy or sell an integral number of units of the particular stock index at a specified future date at a price agreed upon when the contract is made. A unit is the value from time to time of the relevant index. Entering into a contract to buy units is commonly referred to as buying or purchasing a contract or holding a long position in the relevant index. For example, if the value of a unit of a particular index were $1,000, a contract to purchase 500 units would be worth $500,000 (500 units x $1,000). The Index Futures contract specifies that no delivery of the actual stocks making up the index will take place. Instead, settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract price and the actual level of the relevant index at the expiration of the contract. For example, if a Fund enters into one futures contract to buy 500 units of an index at a specified future date at a contract price of $1,000 per unit and the index is at $1,010 on that future date, the Fund will gain $5,000 (500 units x gain of $10). Index Futures in which a Fund may invest typically can be traded through all major commodity brokers and trades are currently effected on the exchanges described in the Prospectus. A Fund may close open positions on the futures exchange on which Index Futures are then traded at any time up to and including the expiration day. All positions which remain open at the close of the last business day of the contract's life are required to settle on the next business day (based upon the value of the relevant index on the expiration day) with settlement made, in the case of S&P 500 Index Futures, with the Commodities Clearing House. Because the specific procedures for trading foreign stock Index Futures on futures exchanges are still under development, additional or different margin requirements as well as settlement procedures may be applicable to foreign stock Index Futures at the time a Fund purchases foreign stock Index Futures. The price of Index Futures may not correlate perfectly with movement in the relevant index due to certain market distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the S&P 500 Index and futures markets. Secondly, the deposit requirements in the futures market are less onerous than margin requirements in the securities market, and as a result the futures market may attract more speculators than does the securities market. Increased participation by speculators in the futures market may also cause temporary price distortions. In addition, trading hours for foreign stock Index Futures may not correspond perfectly to hours of trading on the foreign exchange to which a particular foreign stock Index Future relates. This may result in a disparity between the price of Index Futures and the value of the relevant index due to the lack of continuous arbitrage between the Index Futures price and the value of the underlying index. INVESTMENT RESTRICTIONS Without a vote of the majority of the outstanding voting securities of the relevant Fund, the Trust will not take any of the following actions with respect to any Fund: (1) Borrow money in excess of 10% of the value (taken at the lower of cost or current value) of the Fund's total assets (not including the amount borrowed) at the time the borrowing is made, and then only from banks as a temporary measure to facilitate the meeting of redemption requests (not for leverage) which might otherwise require the untimely disposition of portfolio investments or for extraordinary or emergency purposes. Such borrowings will be repaid before any additional investments are purchased. (2) Pledge, hypothecate, mortgage or otherwise encumber its assets in excess of 10% of the Fund's total assets (taken at cost) and then only to secure borrowings permitted by Restriction 1 above. (The deposit of securities or cash or cash equivalents in escrow in connection with the writing of covered call or put options, respectively, is not deemed to be a pledge or other encumbrance.) (For the purposes of this restriction, collateral arrangements with respect to the writing of options, stock index, interest rate, currency or other futures, options on futures contracts and collateral arrangements with respect to initial and variation margin are not deemed to be a pledge or other encumbrance of assets.) (3) Purchase securities on margin, except such short-term credits as may be necessary for the clearance of purchases and sales of securities. (For this purpose, the deposit or payment of initial or variation margin in connection with futures contracts or related options transactions is not considered the purchase of a security on margin.) (4) Make short sales of securities or maintain a short position for the Fund's account unless at all times when a short position is open the Fund owns an equal amount of such securities or owns securities which, without payment of any further consideration, are convertible into or exchangeable for securities of the same issue as, and equal in amount to, the securities sold short. (5) Underwrite securities issued by other persons except to the extent that, in connection with the disposition of its portfolio investments, it may be deemed to be an underwriter under federal securities laws. (6) Purchase or sell real estate, although it may purchase securities of issuers which deal in real estate, including securities of real estate investment trusts, and may purchase securities which are secured by interests in real estate. (7) Make loans, except by purchase of debt obligations or by entering into repurchase agreements or, through the lending of the Fund's portfolio securities. Loans of portfolio securities may be made with respect to up to 100% of a Fund's total assets in the case of each Fund (except the International Core and Currency Hedged International Core Funds), and with respect to not more than 25% of total assets in the case of each of the International Core and Currency Hedged International Core Funds. (8) Invest in securities of any issuer if, to the knowledge of the Trust, officers and Trustees of the Trust and officers and partners of Grantham, Mayo, Van Otterloo & Co. (the "Manager") who beneficially own more than 1/2 of 1% of the securities of that issuer together beneficially own more than 5%. (9) Concentrate more than 25% of the value of its total assets in any one industry (except that, as described in the Prospectus, the Short-Term Income Fund may invest up to 100% of its assets in obligations issued by banks, and the REIT Fund may invest more than 25% of its assets in real estate-related securities). (10) Invest in securities of other investment companies, except by purchase in the open market involving only customary brokers' commissions. For purposes of this restriction, foreign banks or their agents or subsidiaries are not considered investment companies. (Under the Investment Company Act of 1940 (the "Investment Company Act") no registered investment company may (a) invest more than 10% of its total assets (taken at current value) in securities of other investment companies, (b) own securities of any one investment company having a value in excess of 5% of its total assets (taken at current value), or (c) own more than 3% of the outstanding voting stock of any one investment company.) (11) Purchase or sell commodities or commodity contracts, except that the Funds (other than the Short-Term Income Fund) may purchase and sell financial futures contracts and options thereon. (12) Except for the Global Bond Fund, the International Bond Fund, the Domestic Bond Fund, the Currency Hedged International Bond Fund, the Currency Hedged International Core Fund, the Foreign Fund, the REIT Fund, the Global Hedged Equity Fund, the Emerging Country Debt Fund and the Core Emerging Country Debt Fund, invest in (a) securities which at the time of such investment are not readily marketable, (b) securities the disposition of which is restricted under federal securities laws, and (c) repurchase agreements maturing in more than seven days if, as a result, more than 10% of the Fund's total assets (taken at current value) would then be invested in securities described in (a), (b) and (c) above. (13) In addition to the foregoing, it is a fundamental policy that none of the Core Fund, the Japan Fund, the Core II Secondaries Fund, the Fundamental Value Fund, the Tobacco-Free Core Fund, the International Core Fund or the Currency Hedged International Core Fund will acquire more than 10% of the voting securities of any issuer. (14) Issue senior securities, as defined in the 1940 Act and as amplified by rules, regulations and pronouncements of the SEC. Under appropriate circumstances, the SEC takes the position that none of the following is deemed to be a senior security: any swap contract or contract from differences; any pledge or encumbrance of assets permitted by restriction 2 above; any borrowing permitted by restriction 1 above; any collateral arrangements with respect to initial and variational margin; and the purchase or sale of options, forward contracts, futures contracts or options on futures contracts. Notwithstanding the latitude permitted by Restrictions 1, 2, 4 and 6 above, no Fund has any current intention of (a) borrowing money, (b) entering into short sales or (c) investing in real estate investment trusts (with the exception of the REIT Fund). It is contrary to the present policy of all the Funds, which may be changed by the Trustees without shareholder approval, to: (a) Invest in warrants or rights excluding options (other than warrants or rights acquired by the Fund as a part of a unit or attached to securities at the time of purchase) except that the International Funds (other than the International Bond Fund) may invest in such warrants or rights so long as the aggregate value thereof (taken at the lower of cost or market) does not exceed 5% of the value of the Fund's total net assets; provided that within this 5%, not more than 2% of its net assets may be invested in warrants that are not listed on the New York or American Stock Exchange or a recognized foreign exchange. (b) Invest in securities of an issuer, which, together with any predecessors or controlling persons, has been in operation for less than three consecutive years if, as a result, the aggregate of such investments would exceed 5% of the value of the Fund's net assets; except that this restriction shall not apply to any obligation of the U.S. Government or its instrumentalities or agencies; and except that this restriction shall not apply to the investments of the Japan Fund. (c) Buy or sell oil, gas or other mineral leases, rights or royalty contracts. (d) Make investments for the purpose of gaining control of a company's management. (e) In the case of the International Bond Fund, the Domestic Bond Fund, the Currency Hedged International Bond Fund, the Foreign Fund, the REIT Fund, the Global Hedged Equity Fund, and Emerging Country Debt Fund and the Core Emerging Country Debt Fund, purchase securities restricted as to resale, if, as a result, such investments would exceed 15% of the value of the Fund's net assets, excluding restricted securities that have been determined by the Trustees of the Fund (or the person designated by them to make such determinations) to be readily marketable. Except as indicated above in Restriction No. 1, all percentage limitations on investments set forth herein and in the Prospectus will apply at the time of the making of an investment and shall not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment. The phrase "shareholder approval," as used in the Prospectus, and the phrase "vote of a majority of the outstanding voting securities," as used herein with respect to a Fund, means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of that Fund, or (2) 67% or more of the shares of that Fund present at a meeting if more than 50% of the outstanding shares are represented at the meeting in person or by proxy. INCOME, DIVIDENDS, DISTRIBUTIONS AND TAX STATUS Each Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). In order to so qualify, the Fund must, among other things, (a) derive at least 90% of its gross income from dividends, interest, payments with respect to certain securities loans, and gains from the sale of stock, securities and foreign currencies, or other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies; (b) derive less than 30% of its gross income from gains from the sale or other disposition of securities and certain other assets (including certain foreign currency contracts) held for less than three months; (c) distribute at least 90% of its dividend, interest and certain other income (including, in general, short-term capital gains) each year; and (d) diversify its holdings so that, at the end of each fiscal quarter (i) at least 50% of the market value of the Fund's assets is represented by cash items, U.S. Government securities, securities of other regulated investment companies, and other securities, limited in respect of any one issuer to a value not greater than 5% of the value of the Fund's total assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its assets is invested in the securities (other than those of the U.S. Government or other regulated investment companies) of any one issuer or of two or more issuers which the Fund controls and which are engaged in the same, similar or related trades or businesses. So long as a Fund qualifies for treatment as a regulated investment company, the Fund will not be subject to federal income tax on income paid to its shareholders in the form of dividends or capital gain distributions. The tax status of each Fund and the distributions which it may make are summarized in the Prospectus under the heading "Taxes." Each Fund intends to pay out substantially all of its ordinary income and net short-term capital gains, and to distribute substantially all of its net capital gain, if any, after giving effect to any available capital loss carry-over. Net capital gain is the excess of net long-term capital gain over net short-term capital loss. It is the policy of each Fund to make distributions sufficient to avoid the imposition of a 4% excise tax on certain undistributed amounts. The recognition of certain losses upon the sale of shares of a Fund may be limited to the extent shareholders dispose of shares of one Fund and invest in shares of the same or another Fund. The Funds' transactions in options, futures contracts, hedging transactions, forward contracts, straddles and foreign currencies may accelerate income, defer losses, cause adjustments in the holding periods of the Funds' securities and convert short-term capital gains or losses into long-term capital gains or losses. Qualification segments noted above may restrict the Fund's ability to engage in these transactions, and these transactions may affect the amount, timing and character of distributions to shareholders. Investment by the International Funds in certain "passive foreign investment companies" could subject a Fund to a U.S. federal income tax or other charge on distributions received from or the sale of its investment in such a company, which tax cannot be eliminated by making distributions to Fund shareholders. If the Fund elects to treat a passive foreign investment company as a "qualified electing fund," or elects the mark-to-market election under proposed regulation 1291.8, different rules would apply, although the Fund does not currently expect to be in the position to make such elections. In general, all dividends derived from ordinary income and short-term capital gain are taxable to investors as ordinary income (subject to special rules concerning the extent of the dividends received deduction for corporations) and long-term capital gain distributions are taxable to investors as long-term capital gains, whether such dividends or distributions are received in shares or cash. Tax exempt organizations or entities will generally not be subject to federal income tax on dividends or distributions from a Fund, except certain organizations or entities, including private foundations, social clubs, and others, which may be subject to tax on dividends or capital gains. Each organization or entity should review its own circumstances and the federal tax treatment of its income. The dividends-received deduction for corporations will generally apply to a Fund's dividends paid from investment income to the extent derived from dividends received by the Fund from domestic corporations. Certain of the Funds which invest in foreign securities may be subject to foreign withholding taxes on income and gains derived from foreign investments. Such taxes would reduce the yield on the Trust's investments, but, as discussed in the Prospectus, may be taken as either a deduction or a credit by U.S. citizens and corporations if the Fund makes the election described in the Prospectus. MANAGEMENT OF THE TRUST The Trustees and officers of the Trust and their principal occupations during the past five years are as follows: R. Jeremy Grantham*. President-Domestic Quantitative and Trustee of the Trust. Partner, Grantham, Mayo, Van Otterloo & Co. (investment adviser). Harvey R. Margolis. Trustee of the Trust. Mathematics Professor, Boston College. Eyk del Mol Van Otterloo*. President-International and Trustee of the Trust. Partner, Grantham, Mayo, Van Otterloo & Co. Richard Mayo*. President-Domestic Active of the Trust. Partner, Grantham, Mayo, Van Otterloo & Co. Kingsley Durant*. Vice President, Treasurer and Secretary of the Trust. Partner, Grantham, Mayo, Van Otterloo & Co. Susan Randall Harbert*. Secretary and Assistant Treasurer of the Trust. Partner, Grantham, Mayo, Van Otterloo & Co. William R. Royer, Esq.*. Clerk of the Trust. General Counsel, Grantham, Mayo, Van Otterloo & Co. (January, 1995 - Present). Associate, Ropes & Gray, Boston, Massachusetts (September, 1992 - January, 1995). *Deemed to be an "interested person" of the Trust and the Manager, as defined by the 1940 Act. The mailing address of each of the officers and Trustees is c/o GMO Trust, 40 Rowes Wharf, Boston, Massachusetts 02110. The Trustees and officers of the Trust as a group own less than 1% of any class of outstanding shares of the Trust. Except as stated above, the principal occupations of the officers and Trustees for the last five years have been with the employers as shown above, although in some cases they have held different positions with such employers. The Manager pays the Trustees other than those who are interested persons an annual fee of $40,000. Harvey Margolis is currently the only Trustee who is not an interested person, and thus the only Trustee compensated directly by the Trust. No other Trustee receives any direct compensation from the Trust or any series thereof. Messrs. Grantham, Van Otterloo, Mayo and Durant, as partners of the Manager, will benefit from the management fees paid by each Fund of the Trust. INVESTMENT ADVISORY AND OTHER SERVICES Management Contracts As disclosed in the Prospectus under the heading "Management of the Fund," under separate Management Contracts (each a "Management Contract") between the Trust and Grantham, Mayo, Van Otterloo & Co. (the "Manager"), subject to such policies as the Trustees of the Trust may determine, the Manager will furnish continuously an investment program for each Fund and will make investment decisions on behalf of the Fund and place all orders for the purchase and sale of portfolio securities. Subject to the control of the Trustees, the Manager also manages, supervises and conducts the other affairs and business of the Trust, furnishes office space and equipment, provides bookkeeping and certain clerical services and pays all salaries, fees and expenses of officers and Trustees of the Trust who are affiliated with the Manager. As indicated under "Portfolio Transactions --Brokerage and Research Services," the Trust's portfolio transactions may be placed with broker-dealers which furnish the Manager, at no cost, certain research, statistical and quotation services of value to the Manager in advising the Trust or its other clients. As is disclosed in the Prospectus, the Manager's compensation will be reduced to the extent that any Fund's annual expenses incurred in the operation of the Fund (including the management fee but excluding brokerage commissions, extraordinary expenses (including taxes), securities lending fees and expenses and transfer taxes; and, in the case of the Japan Fund, Emerging Markets Fund, Foreign Fund and Global Hedged Equity Fund, excluding custodial fees; and in the case of the Global Hedged Equity Fund only, also excluding hedging transaction fees) would exceed the percentage of the Fund's average daily net assets described therein. Because the Manager's compensation is fixed at an annual rate equal to this expense limitation, it is expected that the Manager will pay such expenses (with the exceptions noted) as they arise. In addition, the Manager's compensation under the Management Contract is subject to reduction to the extent that in any year the expenses of the relevant Fund exceed the limits on investment company expenses imposed by any statute or regulatory authority of any jurisdiction in which shares of such Fund are qualified for offer and sale. The term "expenses" is defined in the statutes or regulations of such jurisdictions, and, generally speaking, excludes brokerage commissions, taxes, interest and extraordinary expenses. No Fund is currently subject to any state imposed limit on expenses. Each Management Contract provides that the Manager shall not be subject to any liability in connection with the performance of its services thereunder in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations and duties. Each Management Contract was approved by the Trustees of the Trust (including the Trustee who is not an "interested person" of the Manager) and by the relevant Fund's sole shareholder in connection with the organization of the Trust and the establishment of the Funds. Each Management Contract will continue in effect for a period more than two years from the date of its execution only so long as its continuance is approved at least annually by (i) vote, cast in person at a meeting called for that purpose, of a majority (or one, if there is only one) of those Trustees who are not "interested persons" of the Manager or the Trust, and by (ii) the majority vote of either the full Board of Trustees or the vote of a majority of the outstanding shares of the relevant Fund. Each Management Contract automatically terminates on assignment, and is terminable on not more than 60 days' notice by the Trust to the Manager. In addition, each Management Contract may be terminated on not more than 60 days' written notice by the Manager to the Trust. In the last three fiscal years the Funds have paid the following amounts as Management Fees to the Manager pursuant to the relevant Management Contract:
Gross Reduction Net CORE FUND Year ended 2/28/95 $10,703,745 $1,492,476 $ 9,211,269 Year ended 2/28/94 $ 9,872,383 $1,323,098 $ 8,549,285 Year ended 2/26/93 $12,080,377 $1,424,465 $10,655,912 INTERNATIONAL CORE FUND Year ended 2/28/95 $19,964,039 $3,849,845 $16,114,194 Year ended 2/28/94 $12,131,276 $2,974,235 $ 9,157,041 Year ended 2/26/93 $ 4,498,002 $1,290,142 $ 3,207,860 GROWTH ALLOCATION FUND Year ended 2/28/95 $ 1,063,102 $ 162,479 $ 900,623 Year ended 2/28/94 $ 732,330 $ 136,305 $ 596,025 Year ended 2/26/93 $ 1,009,458 $ 143,307 $ 866,151 SHORT-TERM INCOME FUND Year ended 2/28/95 $ 32,631 $ 24,693 $ 7,938 Year ended 2/28/94 $ 25,648 $ 25,012 $ 636 Year ended 2/26/93 $ 31,464 $ 31,464 $ 0 JAPAN FUND Year ended 2/28/95 $ 3,394,922 $ 113,442 $ 3,281,480 Year ended 2/28/94 $ 2,985,621 $ 116,523 $ 2,869,098 Year ended 2/26/93 $ 1,827,062 $ 120,816 $ 1,706,246 VALUE ALLOCATION FUND Year ended 2/28/95 $ 3,144,806 $ 612,779 $ 2,532,027 Year ended 2/28/94 $ 7,860,120 $1,319,736 $ 6,540,384 Year ended 2/26/93 $ 6,383,292 $1,109,271 $ 5,274,021 TOBACCO-FREE CORE FUND Year ended 2/28/95 $ 260,209 $ 140,422 $ 119,787 Year ended 2/28/94 $ 285,625 $ 123,056 $ 162,569 Year ended 2/26/93 $ 462,477 $ 144,724 $ 317,753 FUNDAMENTAL VALUE FUND Year ended 2/28/95 $ 1,297,348 $ 118,250 $ 1,179,098 Year ended 2/28/94 $ 847,075 $ 131,219 $ 715,856 Year ended 2/26/93 $ 302,376 $ 119,657 $ 182,719 CORE II SECONDARIES FUND Year ended 2/28/95 $ 865,852 $ 187,546 $ 678,306 Year ended 2/28/94 $ 626,163 $ 154,249 $ 471,914 Year ended 2/26/93 $ 414,388 $ 132,039 $ 282,349 INTERNATIONAL SMALL COMPANIES FUND Year ended 2/28/95 $ 2,184,055 $1,368,080 $ 815,975 Year ended 2/28/94 $ 833,440 $ 625,615 $ 207,825 Year ended 2/26/93 $ 366,646 $ 320,728 $ 45,918 U.S. SECTOR ALLOCATION FUND Year ended 2/28/95 $ 934,108 $ 179,986 $ 754,122 Year ended 2/28/94 $ 848,089 $ 141,400 $ 706,689 Commencement of Operations $ 125,141 $ 61,672 $ 63,469 (1/04/93) - 2/26/93 INTERNATIONAL BOND FUND Year ended 2/28/95 $ 345,558 $ 181,243 $ 164,315 Commencement of Operations $ 23,776 $ 23,776 $ 0 (12/22/93) - 2/28/94 EMERGING MARKETS FUND Year ended 2/28/95 $ 3,004,553 $ 0 $ 3,004,553 Commencement of Operations $ 158,043 $ 18,574 $ 139,469 (12/8/93) - 2/28/94 EMERGING COUNTRY DEBT FUND Commencement of Operations $ 417,918 $ 174,820 $ 243,098 (4/19/94) - 2/28/95 GLOBAL HEDGED EQUITY FUND Commencement of Operations $ 324,126 $ 80,409 $ 243,717 (7/29/94) - 2/28/95 DOMESTIC BOND FUND Commencement of Operations $ 95,643 $ 68,732 $ 26,911 (8/18/94) - 2/28/95 CURRENCY HEDGED INTERNATIONAL BOND FUND Commencement of Operations $ 306,031 $ 173,302 $ 132,729 (9/30/94) - 2/28/95
Custodial Arrangements. Investors Bank & Trust Company ("IBT"), One Lincoln Plaza, Boston, Massachusetts 02205, and Brown Brothers Harriman & Co. ("BBH"), 40 Water Street, Boston, Massachusetts 02109 serve as the Trust's custodians on behalf of the Funds. As such, IBT or BBH holds in safekeeping certificated securities and cash belonging to a Fund and, in such capacity, is the registered owner of securities in book-entry form belonging to a Fund. Upon instruction, IBT or BBH receives and delivers cash and securities of a Fund in connection with Fund transactions and collects all dividends and other distributions made with respect to Fund portfolio securities. Each of IBT and BBH also maintains certain accounts and records of the Trust and calculates the total net asset value, total net income and net asset value per share of each Fund on a daily basis. The Japan Fund pays its own custodial charges. The Manager has voluntarily agreed with the Trust to reduce its management fees and to bear certain expenses with respect to each Fund until further notice to the extent that a Fund's total annual operating expenses (excluding brokerage commissions, extraordinary expenses (including taxes), securities lending fees and expenses and transfer taxes; and, in the case of the Foreign Fund, Japan Fund, Emerging Markets Fund and Global Hedged Equity Fund, excluding custodial fees; and, in the case of the Global Hedged Equity Fund only, also excluding hedging transaction fees) would otherwise exceed the percentage of that Fund's daily net assets specified in the Prospectus ("Schedule of Fees and Expenses"). Therefore so long as the Manager agrees so to reduce its fee and bear certain expenses, total annual operating expenses (subject to such exclusions,) of the Fund will not exceed this stated limitation. The Manager has also agreed with respect to the Emerging Markets Fund that, until further notice, it will limit its management fee with respect to this Fund to 0.98% regardless of the total operating expenses of the Fund. Absent such agreement by the Manager to waive its fees, management fees for each Fund and the annual operating expenses for each Fund would be as stated in the Prospectus. Independent Accountants. The Trust's independent accountants are Price Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110. Price Waterhouse LLP conducts annual audits of the Trust's financial statements, assists in the preparation of each Fund's federal and state income tax returns, consults with the Trust as to matters of accounting and federal and state income taxation and provides assistance in connection with the preparation of various Securities and Exchange Commission filings. PORTFOLIO TRANSACTIONS The purchase and sale of portfolio securities for each Fund and for the other investment advisory clients of the Manager are made by the Manager with a view to achieving their respective investment objectives. For example, a particular security may be bought or sold for certain clients of the Manager even though it could have been bought or sold for other clients at the same time. Likewise, a particular security may be bought for one or more clients when one or more other clients are selling the security. In some instances, therefore, one client may sell indirectly a particular security to another client. It also happens that two or more clients may simultaneously buy or sell the same security, in which event purchases or sales are effected on a pro rata, rotating or other equitable basis so as to avoid any one account's being preferred over any other account. Transactions involving the issuance of Fund shares for securities or assets other than cash, will be limited to a bona fide reorganization or statutory merger and to other acquisitions of portfolio securities that meet all of the following conditions: (a) such securities meet the investment objectives and policies of the Fund; (b) such securities are acquired for investment and not for resale; (c) such securities are liquid securities which are not restricted as to transfer either by law or liquidity of market; and (d) such securities have a value which is readily ascertainable as evidenced by a listing on the American Stock Exchange, the New York Stock Exchange, NASDAQ or a recognized foreign exchange. Brokerage and Research Services. In placing orders for the portfolio transactions of each Fund, the Manager will seek the best price and execution available, except to the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. The determination of what may constitute best price and execution by a broker-dealer in effecting a securities transaction involves a number of considerations, including, without limitation, the overall net economic result to the Fund (involving price paid or received and any commissions and other costs paid), the efficiency with which the transaction is effected, the ability to effect the transaction at all where a large block is involved, availability of the broker to stand ready to execute possibly difficult transactions in the future and the financial strength and stability of the broker. Because of such factors, a broker-dealer effecting a transaction may be paid a commission higher than that charged by another broker-dealer. Most of the foregoing are judgmental considerations. Over-the-counter transactions often involve dealers acting for their own account. It is the Manager's policy to place over-the-counter market orders for the Domestic Funds with primary market makers unless better prices or executions are available elsewhere. Although the Manager does not consider the receipt of research services as a factor in selecting brokers to effect portfolio transactions for a Fund, the Manager will receive such services from brokers who are expected to handle a substantial amount of the Funds' portfolio transactions. Research services may include a wide variety of analyses, reviews and reports on such matters as economic and political developments, industries, companies, securities and portfolio strategy. The Manager uses such research in servicing other clients as well as the Funds. As permitted by Section 28(e) of the Securities Exchange Act of 1934 and subject to such policies as the Trustees of the Trust may determine, the Manager may pay an unaffiliated broker or dealer that provides "brokerage and research services" (as defined in the Act) to the Manager an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction. During the three most recent fiscal years, the Trust paid, on behalf of the Funds, the following amounts in brokerage commissions:
1993 1994 1995 TOTAL Core Fund $2,470,801 $1,176,157 $4,641,334 $8,288,292 Growth Allocation Fund 222,747 159,018 211,476 $ 593,241 SAF Core Fund 249,717 158,642 --- $ 408,359 Value Allocation Fund 1,803,808 1,911,868 1,523,065 $5,238,741 Short-Term Income Fund --- --- --- --- International Core Fund 1,505,681 2,911,201 4,518,970 $8,935,852 Japan Fund 447,978 138,019 1,038,223 $1,624,220 Tobacco-Free Core Fund 120,642 70,113 126,491 $ 317,246 Fundamental Value Fund 184,309 508,267 444,239 $1,136,815 International Small Companies Fund 54,565 279,639 470,900 $ 805,104 Bond Allocation Fund 3,046 34,238 29,533 $ 66,817 Core II Secondaries Fund 34,155 127,191 211,451 $ 372,797 U.S. Sector Allocation Fund 29,586 166,982 434,291 $ 630,859 International Bond Fund --- 1,340 3,251 $ 4,591 Emerging Markets Fund --- 423,879 2,668,508 $3,092,387 Emerging Country Debt Fund --- --- --- --- Global Hedged Equity Fund --- --- 146,893 $ 146,893 Domestic Bond Fund --- --- --- --- Currency Hedged International Bond --- --- --- --- Fund Total $7,127,035 $8,066,554 $16,468,625 $31,662,214
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES The Trust is organized as a Massachusetts business trust under the laws of Massachusetts by an Agreement and Declaration of Trust ("Declaration of Trust") dated June 24, 1985. A copy of the Declaration of Trust is on file with the Secretary of The Commonwealth of Massachusetts. The fiscal year for each Fund ends on February 28. Pursuant to the Declaration of Trust, the Trustees have currently authorized the issuance of an unlimited number of full and fractional shares of twenty-four series: the Core Fund; the Value Allocation Fund; the Growth Allocation Fund; the Pelican Fund; the Short-Term Income Fund; the Core II Secondaries Fund; the Fundamental Value Fund, the Tobacco-Free Core Fund; the U.S. Sector Allocation Fund; the Conservative Equity Fund; the International Core Fund; the Japan Fund; the Core Emerging Country Debt Fund; the International Bond Fund; the Emerging Markets Fund; the Emerging Country Debt Fund; the Domestic Bond Fund; the Currency Hedged International Bond Fund; the Global Hedged Equity Fund; the Currency Hedged International Core Fund; the International Small Companies Fund; the REIT Fund; the Global Bond Fund and the Foreign Fund. Interests in each portfolio (Fund) are represented by shares of the corresponding series. Each share of each series represents an equal proportionate interest, together with each other share, in the corresponding Fund. The shares of such series do not have any preemptive rights. Upon liquidation of a Fund, shareholders of the corresponding series are entitled to share pro rata in the net assets of the Fund available for distribution to shareholders. The Declaration of Trust also permits the Trustees to charge shareholders directly for custodial, transfer agency and servicing expenses, but there is no present intention to make such charges. The Declaration of Trust also permits the Trustees, without shareholder approval, to subdivide any series of shares into various sub-series of shares with such dividend preferences and other rights as the Trustees may designate. While the Trustees have no current intention to exercise this power, it is intended to allow them to provide for an equitable allocation of the impact of any future regulatory requirements which might affect various classes of shareholders differently. The Trustees may also, without shareholder approval, establish one or more additional separate portfolios for investments in the Trust or merge two or more existing portfolios. Shareholders' investments in such a portfolio would be evidenced by a separate series of shares. The Declaration of Trust provides for the perpetual existence of the Trust. The Trust, however, may be terminated at any time by vote of at least two-thirds of the outstanding shares of the Trust. While the Declaration of Trust further provides that the Trustees may also terminate the Trust upon written notice to the shareholders, the 1940 Act requires that the Trust receive the authorization of a majority of its outstanding shares in order to change the nature of its business so as to cease to be an investment company. Voting Rights As summarized in the Prospectus, shareholders are entitled to one vote for each full share held (with fractional votes for fractional shares held) and will vote (to the extent provided herein) in the election of Trustees and the termination of the Trust and on other matters submitted to the vote of shareholders. Shareholders vote by individual Fund on all matters except (i) when required by the Investment Company Act of 1940, shares shall be voted in the aggregate and not by individual Fund, and (ii) when the Trustees have determined that the matter affects only the interests of one or more Funds, then only shareholders of such Funds shall be entitled to vote thereon. Shareholders of one Fund shall not be entitled to vote on matters exclusively affecting another Fund, such matters including, without limitation, the adoption of or change in the investment objectives, policies or restrictions of the other Fund and the approval of the investment advisory contracts of the other Fund. There will normally be no meetings of shareholders for the purpose of electing Trustees except that in accordance with the 1940 Act (i) the Trust will hold a shareholders' meeting for the election of Trustees at such time as less than a majority of the Trustees holding office have been elected by shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees, less than two-thirds of the Trustees holding office have been elected by the shareholders, that vacancy may only be filled by a vote of the shareholders. In addition, Trustees may be removed from office by a written consent signed by the holders of two-thirds of the outstanding shares and filed with the Trust's custodian or by a vote of the holders of two-thirds of the outstanding shares at a meeting duly called for the purpose, which meeting shall be held upon the written request of the holders of not less than 10% of the outstanding shares. Upon written request by the holders of at least 1% of the outstanding shares stating that such shareholders wish to communicate with the other shareholders for the purpose of obtaining the signatures necessary to demand a meeting to consider removal of a Trustee, the Trust has undertaken to provide a list of shareholders or to disseminate appropriate materials (at the expense of the requesting shareholders). Except as set forth above, the Trustees shall continue to hold office and may appoint successor Trustees. Voting rights are not cumulative. No amendment may be made to the Declaration of Trust without the affirmative vote of a majority of the outstanding shares of the Trust except (i) to change the Trust's name or to cure technical problems in the Declaration of Trust and (ii) to establish, designate or modify new and existing series or sub-series of Trust shares or other provisions relating to Trust shares in response to applicable laws or regulations. Shareholder and Trustee Liability Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Trust. However, the Declaration of Trust disclaims shareholder liability for acts or obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation, or instrument entered into or executed by the Trust or the Trustees. The Declaration of Trust provides for indemnification out of all the property of the relevant Fund for all loss and expense of any shareholder of that Fund held personally liable for the obligations of the Trust. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is considered remote since it is limited to circumstances in which the disclaimer is inoperative and the Fund of which he is or was a shareholder would be unable to meet its obligations. The Declaration of Trust further provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law. However, nothing in the Declaration of Trust protects a Trustee against any liability to which the Trustee would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office. The By-laws of the Trust provide for indemnification by the Trust of the Trustees and the officers of the Trust except with respect to any matter as to which any such person did not act in good faith in the reasonable belief that his action was in or not opposed to the best interests of the Trust. Such person may not be indemnified against any liability to the Trust or the Trust shareholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Beneficial Owners of 5% or More of the Fund's Shares The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the Core Fund as of October 13, 1995:
Name Address % Ownership Employee Retirement Plan of 201 Fourth Street 5.07 Safeway IN Oakland, CA 94660 NRECA Attn: Peter Morris 7.53 1800 Massachusetts Ave. NW Washington, DC 20036
The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the International Core Fund as of October 13, 1995:
Name Address % Ownership RJR Nabisco Defined Benefits Attn: Sandy Breda 5.08 Master Trust - P.O. Box 3099 International Accounts Winston-Salem, NC 27150
The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the Growth Allocation Fund as of October 13, 1995:
Name Address % Ownership Aerospace Corporation Attn: Mutual Funds 11.50 Retirement Plan P.O. Box 92956 Northern Trust Co. Chicago, IL 60675 John D. MacArthur & Attn: Lawrence L. Landry 8.42 Catherine T. MacArth 140 South Dearborn Foundation Suite 1100 Chicago, IL 60603 Yale University 230 Prospect Street 13.95 Attn: Theodore D. Seides New Haven, CT 06511 Surdna Foundation Inc. 1155 Avenue of the Americas 14.12 16th Floor New York, NY 10036 Collins Group Trust I 840 Newport Center Dr. 11.31 Newport Beach, CA 92660 Duke University 2200 West Main St. 6.41 Long Term Endowment Suite 1000 Attn: Deborah Lane Durham, NC 27705
The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the Japan Fund as of October 13, 1995:
Name Address % Ownership International Monetary Staff 700 19th St., NW 44.91 Retirement Fund Attn: Hillary Boardman Washington, DC 20431 SIMI Client #05 2000 K Street, NW 6.01 Suite 400 Washington, DC 20006 Gordon Family Trust c/o Strategic Investment Management 19.28 1001 19th Street North, 16th Floor Arlington, VA 22209-1722 Brown University Investment Office - Box C 29.78 Attn: Robert J. Koyles, Jr. 164 Angell Street Providence, RI 02912
The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the Short-Term Income Fund as of October 13, 1995:
Name Address % Ownership MJH Foundation Attn: J. Michael Burris 41.48 Martha Jefferson Hospital 459 Locust Avenue Charlottesville, VA 22902 Powers C. Hall c/o Warner & Stackpole 12.23 Profit Sharing Plan and Trust 75 State Street U/A dated 6/1/79 as amended Boston, MA 02109 6/1/89 Timothy Hamilton Horkings 5 Hollywood Drive 5.43 Chestnut Hill, MA 02167 Dorothy D. Park - Fixed Income 205 Devon Road 24.68 Ithaca, NY 14850
The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the Value Allocation Fund as of October 13, 1995:
Name Address % Ownership Duke University Long Term Duke Management Co. 6.91 Endowment Fund 2200 West Main Street Suite 1000 Durham, NC 27705 International Monetary Staff 700 19th St., NW 11.80 Retirement Fund Attn: Hillary Boardman Washington, DC 20431 Leland Stanford Junior Stanford Management Company 23.25 University II 2770 Sand Hill Road Menlo Park, CA 94025
The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the Fundamental Value Fund as of October 13, 1995:
Name Address % Ownership Princeton University Trustee Attn: John D. Sweeney 5.29 P.O. Box 35 Princeton, NJ 08544 Yale University 230 Prospect Street 29.71 Attn: Theodore D. Seides New Haven, CT 06511 Berea College Box 2306 13.46 Attn: Mr. Leigh A. Jones Berea, KY 40404 Leland Stanford Junior Stanford Management Company 32.33 University II 2770 Sand Hill Road Menlo Park, CA 04025 Wachovia Bank Trustee P.O. Box 3099 19.12 RJR Nabisco Inc. 301 North Main Street Defined Benefit/Master Winston-Salem, NC 27150 Trust - FVF
The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the Core II Secondaries Fund as of October 13, 1995:
Name Address % Ownership The Andrew W. Mellon Foundation 140 E. 62nd Street 13.18 Attn: Kenneth J. Herr, Treasurer New York, NY 10021 Cheyne Walk Trust Pearce Investments Ltd. 7.83 Attn: Howard Reynolds 1325 Air Motive Way, Suite 262 Reno, NV 89502 John D. MacArthur & Catherine T. Attn: Lawrence L. Landry 10.19 MacArth Foundation 140 South Dearborn Suite 1100 Chicago, IL 60603 Wachovia Bank Trustee Attn: Julie Haynes NC 31013 7.70 RJR Nabisco Inc. P.O. Box 3099 Defined Benefit/Master Winston-Salem, NC 27150 Trust Bost & Co./BAMF8721002 1 Cabot Road 028-003B 11.59 Bell Atlantic Mutual Fund Operations Medford, MA 02155 Bankers Trust Company Trustee Attn: Geoffrey Mullen 17.80 GTE Service Corp Pension 280 Park Avenue - 13 East Trust New York, NY 10017 William & Flora Hewlett Attn: William F. Nichols 7.85 525 Middlefield Rd #200 Menlo Park, CA 94025 NationsBank Trust Co. N.A. Attn: SAS 5.11 FBO Brookings Institution Acc't #: 45-16-161-7467244 P.O. Box 831575 Dallas, TX 75283
The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the International Small Companies Fund as of October 13, 1995:
Name Address % Ownership Yale University 230 Prospect Street 7.57 Attn: Theodore D. Seides New Haven, CT 06511 Bankers Trust Company Trustee Attn: Geoffrey Mullen 6.66 GTE Service Corp Pension Trust 280 Park Avenue - 13 East New York, NY 10017 International Monetary Fund Staff 700-19th Street NW IS2-281 5.16 Retirement Plan Washington, DC 20431
The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the Tobacco-Free Core Fund as of October 13, 1995:
Name Address % Ownership Dewitt Wallace-Reader's Digest 261 Madison Avenue 45.51 Fund, Inc. 24th Floor New York, NY 10016 Lila Wallace-Reader's Digest 261 Madison Avenue 38.82 Fund, Inc. 24th Floor New York, NY 10016 Tufts Associated HMO Inc. 353 Wyman Street 15.66 Waltham, MA 02254
The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the U.S. Sector Allocation Fund as of October 13, 1995:
Name Address % Ownership John D. MacArthur & Catherine T. Attn: Lawrence L. Landry 54.50 MacArthur Foundation 140 South Dearborn, Suite 1100 Chicago, IL 60603 Trustees of Columbia University Columbia University 18.22 in the City of New York-Global 475 Riverside Drive, Suite 401 New York, NY 10115 Bost & Co./BAMF8721002 1 Cabot Road 028-003B 10.93 Bell Atlantic Mutual Fund Operations Medford, MA 02155
The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the International Bond Fund as of October 13, 1995:
Name Address % Ownership Catholic Bishop of Chicago 155 East Superior Street 6.41 Attn: John F. Benware Chicago, IL 60611 Bost & Co./BAMF8721002 1 Cabot Road 028-003B 8.19 Bell Atlantic Mutual Fund Operations Medford, MA 02155 Saturn & Co. A/C 4600712 P.O. Box 1537 Top 57 12.96 c/o Investors Bank & Trust Co. Boston, MA 02205 FBO The John Hancock Mutual Life Insurance Company Pension Plan Bankers Trust Company Trustee Attn: Geoffrey Mullen 23.57 GTE Service Pension Trust 280 Park Avenue - 13 East New York, NY 10017 Woods Hole Oceanographic Attn: Lawrence Ladd 5.19 Institute Woods Hole, MA 02543
The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the Emerging Markets Fund as of October 13, 1995:
Name Address % Ownership Leland Stanford Jr. University II - 2770 Sand Hill Road 6.72 AA Stanford Management Company Menlo Park, CA 94025 Bankers Trust Company Trustee Attn: Geoffrey Mullen 13.54 GTE Service Corp. Pension Trust 280 Park Avenue - 13 East New York, NY 10017
The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the Domestic Bond Fund as of October 13, 1995;
Name Address % Ownership Bost & Co./BAMF8721002 1 Cabot Road 028-003B 25.86 Bell Atlantic Mutual Fund Operations Medford, MA 02155 Bankers Trust Company Trustee Attn: Geoffrey Mullen 43.28 GTE Service Corp. Pension Trust 280 Park Avenue - 13 East New York, NY 10017 Princeton University TR Attn: John D. Sweeney 5.51 P.O. Box 35 Princeton, NJ 08544 The Edna McConnell Clark Found. Attn: Laura Kielczewski 5.76 Ass't Financial Officer 250 Park Avenue New York, NY 10177
The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the Currency Hedged International Bond Fund as of October 13, 1995:
Name Address % Ownership Princeton University Tr. Attn: John D. Sweeney 5.02 P.O. Box 35 Princeton, NJ 08544 Bost & Co./BAMF8721002 1 Cabot Road 028-003B 13.16 Bell Atlantic Mutual Fund Operations Medford, MA 02155 Bankers Trust Company Trustee Attn: Geoffrey Mullen 39.73 GTE Service Corp. Pension Trust 280 Park Avenue - 13 East New York, NY 10017 Park Foundation Inc. - Attn: Sharon Linderberry 7.19 Fixed Income Terrace Hill P.O. Box 550 Ithaca, NY 14851
The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the Emerging Country Debt Fund as of October 13, 1995:
Name Address % Ownership Yale University 230 Prospect Street 6.85 Attn: Theodore D. Seides New Haven, CT 06511 Bost & Co./BAMF8721002 1 Cabot Road 028-003B 7.53 Bell Atlantic Mutual Fund Operations Medford, MA 02155 Bankers Trust Company Trustee Attn: Geoffrey Mullen 16.17 GTE Service Corp. Pension Trust 280 Park Avenue - 13 East New York, NY 10017 Regents of the Univ. Michigan 5032 Fleming Admin. Bldg. 12.56 Treasurer's Office Ann Arbor, MI 48109 Duke University Long Term 2200 W. Main Street 5.18 Endowment Po Suite 1000 Attn: Deborah Lane Durham, NC 27705
The following chart sets forth the names, addresses and percentage ownership of those shareholders owning beneficially 5% or more of the outstanding shares of the Global Hedged Equity Fund as of October 13, 1995:
Name Address % Ownership Princeton University TR Attn: John D. Sweeney 6.66 P.O. Box 35 Princeton, NJ 08544 Bankers Trust Company TR Attn: Geoffrey Mullen 27.58 GTE Services Corp. Pension Trust 280 Park Avenue - 13 East New York, NY 10017 Duke University Long Term 2200 W. Main Street 8.10 Endowment PO Suite 1000 Attn: Deborah Lane Durham, NC 27705
FINANCIAL STATEMENTS The audited Financial Statements in this Statement of Additional Information have been so included in reliance on the reports of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. GMO Trust Specimen Price-Make-Up Sheet Following are computations of the total offering price per share for the Core Fund, the International Core Fund, the Growth Allocation Fund, the Short-Term Income Fund, the Japan Fund, the Value Allocation Fund, the Tobacco-Free Core Fund, the Core II Secondaries Fund, the International Small Companies Fund, the U.S. Sector Allocation Fund, the International Bond Fund, the Emerging Markets Fund, the Emerging Country Debt Fund, the Global Hedged Equity Fund, the Domestic Bond Fund, the Currency Hedged International Bond Fund, the Fundamental Value Fund and the Pelican Fund based upon their respective net asset values and shares of beneficial interest outstanding at the close of business on August 31, 1995. Core Fund Net Assets at Value (Equivalent to $18.25 per share based on 158,659,078 shares of beneficial $2,895,123,678 interest outstanding) Offering Price ($18.25 x 100/99.83)* $18.28 International Core Fund Net Assets at Value (Equivalent to $23.65 per share based on 140,653,201 shares of beneficial interest outstanding) $3,326,025,113 Offering Price ($23.65 x 100/99.25)* $23.83 ------ Growth Allocation Fund Net Assets at Value (Equivalent to $5.04 per share based on 67,350,475 shares of beneficial interest outstanding) $339,184,306 Offering Price ($5.04 x 100/99.83)* $5.05 ----- Short-Term Income Fund Net Assets at Value (Equivalent to $9.65 per share based on 697,949 shares of beneficial interest outstanding) $6,732,609 Offering Price $9.65 Japan Fund Net Assets at Value (Equivalent to $9.69 per share based on 10,333,221 shares of beneficial interest outstanding) $100,134,319 Offering Price ($9.69 x 100/99.60)* $9.73 ----- Value Allocation Fund Net Assets at Value (Equivalent to $13.65 per share based on 22,8645,103 shares of beneficial interest outstanding) $311,994,963 Offering Price ($13.65 x 100/99.85)* $13.67 ------ Tobacco-Free Core Fund Net Assets at Value (Equivalent to $12.44 per share based on 4,451,076 shares of beneficial $55,374,239 interest outstanding) Offering Price ($12.44 x 100/99.83)* $12.46 ------ Core II Secondaries Fund Net Assets at Value (Equivalent to $14.92 per share based on 10,171,408 shares of beneficial interest outstanding) $151,752,564 Offering Price ($14.92 x 100/99.25)* $15.03 ------ International Small Companies Fund Net Assets at Value (Equivalent to $12.68 per share based on 15,691,530 shares of beneficial interest outstanding) $199,024,013 Offering Price ($12.68 x 100/98.75)* $12.84 ------ Fundamental Value Fund Net Assets at Value (Equivalent to $14.02 per share based on 14,091,776 shares of beneficial interest outstanding) $197,569,879 Offering Price ($14.02 x 100/99.85)* $14.04 ------ U.S. Sector Allocation Fund Net Assets at Value (Equivalent to $13.06 per share based on 18,053,484 shares of beneficial interest outstanding) $235,791,887 Offering Price ($13.06 x 100/99.83)* $13.08 ------ Emerging Markets Fund Net Assets at Value (Equivalent to $10.53 per share based on 57,879,323 shares of beneficial interest outstanding) $609,629,593 Offering Price ($10.53 x 100/98.4)* $10.70 ------ International Bond Fund Net Assets at Value (Equivalent to $10.69 per share based on 17,840,505 shares) $190,684,124 ------------ Offering Price ($10.69 x 100/99.85)* $10.71 ------ Emerging Country Debt Fund Net Assets at Value (Equivalent to $10.91 per share based on 46,553,536 shares) $507,804,226 ------------ Offering Price ($10.91 x 100/99.50)* $10.96 ------ Global Hedged Equity Fund Net Assets at Value (Equivalent to $10.50 per share based on 32,443,087 shares) $340,697,317 ------------ Offering Price ($10.50 x 100/99.40)* $10.56 ------ Domestic Bond Fund Net Assets at Value (Equivalent to $10.63 per share based on 27,611,985 shares) $293,426,414 ------------ Offering Price $10.63 Currency Hedged International Bond Fund Net Assets at Value (Equivalent to $11.41 per share based on 19,619,510 shares) $223,926,075 ------------ Offering Price ($11.41 x 100/99.85)* $11.43 ------ Currency Hedged International Core Fund Net Assets at Value (Equivalent to $10.80 per share $189,848,432 ------------ based on 17,583,602 shares) Offering Price ($10.80 x 100/99.25)* $10.88 ------ Pelican Fund Net Assets at Value (Equivalent to $13.58 per share based on 11,671,816 shares) $158,491,891 ------------ Offering Price $13.58 - -------------- * Represents maximum offering price charged on certain cash purchases. See "Purchase of Shares" in the Prospectus.
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