-----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, TPxWUaL6uAx0gScF1rR0N4S+3SvlVmYQcJkcVzrRrKeeqVAx2vAoticMAjxMC0BT pNfnSMeSsqlrygJTt9RnSQ== 0000912057-00-022291.txt : 20000509 0000912057-00-022291.hdr.sgml : 20000509 ACCESSION NUMBER: 0000912057-00-022291 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000508 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: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-04347 FILM NUMBER: 621841 BUSINESS ADDRESS: STREET 1: 40 ROWES WHARF CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6173307500 MAIL ADDRESS: STREET 1: 40 ROWES WHARF CITY: BOSTON STATE: MA ZIP: 02110 FORMER COMPANY: FORMER CONFORMED NAME: GMO CORE TRUST DATE OF NAME CHANGE: 19900927 N-30D 1 N-30D GMO VALUE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO VALUE FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Value Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 13, 2000 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- COMMON STOCKS -- 96.6% AEROSPACE -- 0.9% 12,500 Boeing Co 460,937 70,000 Lockheed Martin Corp 1,220,625 ------------- 1,681,562 ------------- AUTOMOTIVE -- 2.3% 25,000 Delphi Automotive Systems 417,188 37,500 Ford Motor Co 1,560,937 27,500 General Motors Corp 2,091,719 ------------- 4,069,844 ------------- BANKING AND FINANCIAL SERVICES -- 10.9% 25,000 Bank of America Corp 1,151,562 37,500 Bank One Corp 967,969 75,000 Block (HR) Inc 3,290,625 50,000 Chase Manhattan Corp 3,981,250 100,000 Citigroup Inc 5,168,750 50,000 First Union Corp 1,475,000 12,500 PNC Bank Corp 483,594 135,000 Washington Mutual Inc 2,986,875 ------------- 19,505,625 ------------- CHEMICALS -- 1.5% 12,500 Air Products and Chemicals 321,875 5,000 Du Pont (E.I.) De Nemours 252,500 25,000 Hercules Inc 412,500 35,000 PPG Industries Inc 1,728,125 ------------- 2,715,000 ------------- COMPUTER AND OFFICE EQUIPMENT -- 3.5% 8,500 Electronic Data Systems Corp 550,375 42,500 IBM Corp 4,335,000 12,500 Pitney Bowes Inc 618,750 37,500 Xerox Corp 813,281 ------------- 6,317,406 -------------
See accompanying notes to the financial statements. 1 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER GOODS -- 3.3% 35,000 Black and Decker Corp 1,152,812 65,000 Eastman Kodak Co 3,725,312 25,000 Hasbro Inc 393,750 25,000 Mattel Co 240,625 50,000 Pactiv Corp* 415,625 ------------- 5,928,124 ------------- ELECTRONIC EQUIPMENT -- 1.9% 25,000 Emerson Electric Co 1,139,062 10,000 General Electric Co 1,321,875 45,000 Raytheon Co, Class B 832,500 ------------- 3,293,437 ------------- FOOD AND BEVERAGE -- 4.3% 25,000 Anheuser Busch Cos Inc 1,603,125 30,000 Coca Cola Enterprises Inc 701,250 122,500 ConAgra Inc 2,005,937 50,000 Nabisco Group Holdings 431,250 7,500 Nestle SA ADR 632,294 37,500 Pepsico Inc 1,209,375 10,000 Ralston-Purina Group 283,125 50,000 Sara Lee Corp 750,000 ------------- 7,616,356 ------------- HEALTH CARE -- 0.9% 37,500 Becton Dickinson & Co 1,164,844 5,000 Johnson & Johnson 358,750 ------------- 1,523,594 ------------- INSURANCE -- 1.8% 42,500 Aetna Life and Casualty Co 1,747,812 47,500 Allstate Corp 926,250 15,000 AON Corp 314,062 5,000 Loews Corp 222,500 ------------- 3,210,624 ------------- MACHINERY -- 2.2% 40,000 Baker Hughes Inc 1,035,000
2 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MACHINERY -- CONTINUED 22,500 Caterpillar Inc 788,906 15,000 FMC Corp* 724,687 37,500 Ingersoll Rand Co 1,436,719 ------------- 3,985,312 ------------- MANUFACTURING -- 2.8% 7,500 Minnesota Mining and Manufacturing Co 660,937 125,000 Owens Corning 1,812,500 17,500 Tyco International Ltd 663,906 37,500 United Technologies Corp 1,910,156 ------------- 5,047,499 ------------- METALS AND MINING -- 0.7% 37,500 Alcan Aluminum Ltd 1,237,500 ------------- OIL AND GAS -- 9.8% 22,500 Amerada Hess Corp 1,137,656 75,000 Burlington Resources Inc 2,071,875 5,000 Chevron Corp 373,437 20,000 EOG Resources Inc 305,000 12,401 Exxon Mobil Corp 933,950 135,000 Occidental Petroleum Corp 2,168,437 32,500 Phillips Petroleum Co 1,243,125 700 Questar Corp 9,756 65,000 Texaco Inc 3,083,437 100,000 Union Pacific Resources Group 893,750 115,000 Unocal Corp 3,076,250 100,000 USX - Marathon Group 2,162,500 ------------- 17,459,173 ------------- PAPER AND ALLIED PRODUCTS -- 5.9% 72,500 Fort James Corp 1,363,906 67,500 International Paper Co 2,484,844 125,000 Kimberly-Clark Corp 6,460,937 5,000 Weyerhaeuser Co 256,563 ------------- 10,566,250 -------------
See accompanying notes to the financial statements. 3 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- PHARMACEUTICALS -- 3.2% 6,900 Glaxo Wellcome PLC ADR 336,375 25,000 Lilly (Eli) & Co 1,485,938 90,000 McKesson HBOC Inc 1,743,750 32,500 Schering Plough Corp 1,133,438 17,500 Smithkline Beecham PLC ADR 983,281 ------------- 5,682,782 ------------- PRIMARY PROCESSING -- 0.3% 20,000 USX-US Steel Group Inc 437,500 ------------- PRINTING AND PUBLISHING -- 0.9% 85,000 R.R. Donnelley and Sons 1,625,625 ------------- REAL ESTATE -- 7.6% 22,500 Duke Realty Investments, REIT 413,438 167,500 Equity Office Properties Trust, REIT 4,009,531 75,000 Equity Residential Properties Trust, REIT 2,995,313 80,000 JP Realty Inc, REIT 1,445,000 75,000 Liberty Property Trust, REIT 1,701,563 75,000 Mack-Cali Realty Corp, REIT 1,781,250 15,000 Simon Property Group Inc, REIT 352,500 10,000 Spieker Properties Inc, REIT 401,250 45,000 United Dominion Realty Trust Inc, REIT 450,000 ------------- 13,549,845 ------------- REFINING -- 2.5% 75,000 Conoco Inc 1,439,063 110,000 Conoco Inc, Class B 2,165,625 15,000 Royal Dutch Petroleum Co 787,500 ------------- 4,392,188 ------------- RETAIL TRADE -- 8.0% 100,000 Albertsons Inc 2,450,000 105,000 CVS Corp 3,675,000 52,500 Federated Department Stores Inc* 1,926,094 65,000 Kroger Co* 966,875 45,000 Safeway Inc* 1,735,313 42,500 Saks Inc* 488,750
4 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- RETAIL TRADE -- CONTINUED 150,000 Toys R Us Inc* 1,856,250 25,000 Wal Mart Stores Inc 1,217,188 ------------- 14,315,470 ------------- SERVICES -- 2.4% 35,000 FedEx Corp* 1,222,813 10,000 Halliburton Company 381,875 2,000 Meredith Corp 57,250 175,000 Waste Management Inc 2,625,000 ------------- 4,286,938 ------------- TECHNOLOGY -- 4.6% 117,500 Compaq Computer Corp 2,922,813 17,500 Computer Sciences Corp* 1,379,219 20,000 Honeywell International Inc 962,500 225,000 Storage Technology Corp* 2,868,750 ------------- 8,133,282 ------------- TELECOMMUNICATIONS -- 5.9% 35,000 AT & T Corp 1,730,313 50,000 Bell Atlantic Corp 2,446,875 50,000 GTE Corp 2,950,000 7,500 MediaOne Group Inc* 588,750 72,500 SBC Communications Inc 2,755,000 ------------- 10,470,938 ------------- TRANSPORTATION -- 2.4% 20,000 AMR Corp* 1,057,500 50,000 Canadian Pacific 975,000 7,500 Delta Air Lines Inc 342,188 75,000 Ryder System Inc 1,396,875 30,000 USAir Group Inc* 560,625 ------------- 4,332,188 ------------- UTILITIES -- 6.1% 35,000 Cinergy Corp 748,125 25,000 Duke Power Co 1,212,500 25,000 El Paso Energy Corp 926,563
See accompanying notes to the financial statements. 5 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- UTILITIES -- CONTINUED 35,000 PG & E Corp 721,875 37,500 Reliant Energy Inc 771,094 75,000 Sempra Energy 1,350,000 62,500 Southern Co 1,386,719 70,000 Texas Utilities Co 2,283,750 40,000 Unicom Corp 1,512,500 ------------- 10,913,126 ------------- TOTAL COMMON STOCKS (COST $201,949,563) 172,297,188 ------------- PREFERRED STOCKS -- 3.3% OFFICE -- 0.4% 37,500 Reckson Associates Realty Corp 7.625% 696,094 ------------- OIL AND GAS -- 1.2% 50,000 Unocal Corp Convertible 6.25% 144A 2,068,750 ------------- REAL ESTATE -- 0.2% 32,500 Crescent Real Estate 6.75% 455,000 ------------- TRANSPORTATION -- 1.5% 67,500 Union Pacific Capital Trust 6.25% 144A* 2,632,500 ------------- TOTAL PREFERRED STOCKS (COST $7,478,517) 5,852,344 ------------- PAR VALUE ($) - ------------- SHORT-TERM INVESTMENTS -- 2.7% CASH EQUIVALENTS -- 2.7% $ 47,293 BankBoston Eurodollar Time Deposit, 6.1175%, due 4/28/00(a) 47,293 $ 365,715 First Union National Bank Time Deposit, 5.8125%, due 3/01/00(a) 365,715 $ 548,573 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(a) 548,573 1,900,000 Merrimac Cash Fund Premium Class(a) 1,900,000
6 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CASH EQUIVALENTS -- CONTINUED $ 2,000,000 Prudential Securities Group, Inc. Master Note, 6.1875%, due 3/10/00(a) 2,000,000 ------------- 4,861,581 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $4,861,581) 4,861,581 ------------- TOTAL INVESTMENTS -- 102.6% (Cost $214,289,661) 183,011,113 Other Assets and Liabilities (net) -- (2.6%) (4,681,628) ------------- TOTAL NET ASSETS -- 100.0% $ 178,329,485 ============= NOTES TO THE SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. ADR - American Depositary Receipt REIT - Real Estate Investment Trust * Non-income producing security. (a) Represents investments of security lending collateral (Note 1). See accompanying notes to the financial statements. 7 GMO VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $214,289,661) (Note 1) $183,011,113 Receivable for investments sold 1,621,587 Dividends and interest receivable 460,244 Receivable for expenses waived or borne by Manager (Note 2) 8,780 ------------ Total assets 185,101,724 ------------ LIABILITIES: Payable for investments purchased 351,844 Payable upon return of securities loaned (Note 1) 4,861,581 Payable for Fund shares repurchased 604,656 Due to custodian 820,866 Payable to affiliate for (Note 2): Management fee 68,273 Shareholder service fee 22,264 Accrued expenses 42,755 ------------ Total liabilities 6,772,239 ------------ NET ASSETS $178,329,485 ============ NET ASSETS CONSIST OF: Paid-in capital $204,382,896 Accumulated net realized gain 5,225,137 Net unrealized depreciation (31,278,548) ------------ $178,329,485 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $178,329,485 ============ SHARES OUTSTANDING: Class III 22,348,335 ============ NET ASSET VALUE PER SHARE: Class III $ 7.98 ============
8 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $19,951) $ 5,400,941 Interest (including securities lending income of $30,942) 373,347 ------------ Total income 5,774,288 ------------ EXPENSES: Management fee (Note 2) 996,644 Custodian and transfer agent fees 48,948 Audit fees 40,521 Legal fees 4,861 Trustees fees (Note 2) 2,425 Registration fees 2,107 Miscellaneous 3,195 Fees waived or borne by Manager (Note 2) (102,057) ------------ 996,644 SHAREHOLDER SERVICE FEE (NOTE 2) Class III 324,993 ------------ Net expenses 1,321,637 ------------ Net investment income 4,452,651 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on investments 24,670,419 ------------ Change in net unrealized appreciation (depreciation) on investments (47,175,356) ------------ Net realized and unrealized loss (22,504,937) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(18,052,286) ============
See accompanying notes to the financial statements. 9 GMO VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 4,452,651 $ 4,794,401 Net realized gain 24,670,419 56,251,289 Change in net unrealized appreciation (depreciation) (47,175,356) (51,003,336) ------------ -------------- Net increase (decrease) in net assets from operations (18,052,286) 10,042,354 ------------ -------------- Distributions to shareholders from: Net investment income Class III (4,344,843) (5,045,206) ------------ -------------- Total distributions from net investment income (4,344,843) (5,045,206) ------------ -------------- In excess of net investment income Class III (520,269) -- ------------ -------------- Total distributions in excess of net investment income (520,269) -- ------------ -------------- Net realized gains Class III (33,002,007) (71,266,327) ------------ -------------- Total distributions from net realized gains (33,002,007) (71,266,327) ------------ -------------- (37,867,119) (76,311,533) ------------ -------------- Net share transactions: (Note 5) Class III 31,407,142 (62,992,395) ------------ -------------- Increase (decrease) in net assets resulting from net share transactions 31,407,142 (62,992,395) ------------ -------------- Total decrease in net assets (24,512,263) (129,261,574) NET ASSETS: Beginning of period 202,841,748 332,103,322 ------------ -------------- End of period (including accumulated undistributed net investment income of $0 and $6,056, respectively) $178,329,485 $ 202,841,748 ============ ==============
10 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.40 $ 14.33 $ 14.85 $ 14.25 $ 12.05 -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.21 0.26 0.31 0.31 0.39 Net realized and unrealized gain (loss) (0.83) 0.13 3.81 2.47 3.71 -------- -------- -------- -------- -------- Total from investment operations (0.62) 0.39 4.12 2.78 4.10 -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.21) (0.27) (0.35) (0.32) (0.39) In excess of net investment income (0.02) -- -- -- -- From net realized gains (1.57) (4.05) (4.29) (1.86) (1.51) -------- -------- -------- -------- -------- Total distributions (1.80) (4.32) (4.64) (2.18) (1.90) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 7.98 $ 10.40 $ 14.33 $ 14.85 $ 14.25 ======== ======== ======== ======== ======== TOTAL RETURN(A) (8.45)% 2.24% 31.54% 21.26% 35.54% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $178,329 $202,842 $332,103 $469,591 $317,612 Net expenses to average daily net assets 0.61% 0.61% 0.61% 0.61% 0.61% Net investment income to average daily net assets 2.06% 1.82% 1.89% 2.17% 2.66% Portfolio turnover rate 104% 37% 40% 84% 65% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: --(b) $ 0.04 $ 0.05 $ 0.04 $ 0.02
(a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Fees and expenses waived or borne by the Manager were less than $0.01 per share. See accompanying notes to the financial statements. 11 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term capital growth primarily through investment in equity securities. The Fund's benchmark is the Russell 1000 Value Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the 12 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 29, 2000 the Fund held no open futures contracts. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund loaned securities having a market value of $4,712,938 collateralized by cash in the amount of $4,861,581, which was invested in short-term instruments. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund enters into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The Fund also enters into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the 13 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Equity swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 29, 2000 the Fund held no open swap agreements. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to the classification of distributions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable 14 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $406,405 $(410,994) $4,589
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .14% of the amount invested. All purchase premiums are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $12,197 in purchase premiums. There is no premium for redemptions, reinvested distributions or in-kind transactions. Effective April 7, 2000, the Fund will no longer charge a purchase premium. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .46% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder 15 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .70% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeded .46% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $2,425. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $224,283,968 and $220,299,193 respectively. At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $217,687,338 $12,135,768 $(46,811,993) $(34,676,225)
4. PRINCIPAL SHAREHOLDER At February 29, 2000, 63.3% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder could have a material effect. 16 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares, including the purchase premiums received by the Fund, were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ------------------------- -------------------------- Shares Amount Shares Amount Class III: ------------ ----------- ------------ ------------ Shares sold 3,412,687 $40,253,289 254,879 $ 3,308,655 Shares issued to shareholders in reinvestment of distributions 3,457,550 33,971,151 5,904,295 68,359,733 Shares repurchased (4,031,453) (42,817,298) (9,828,113) (134,660,783) ------------ ----------- ------------ ------------ Net increase (decrease) 2,838,784 $31,407,142 (3,668,939) $(62,992,395) ============ =========== ============ ============
17 GMO VALUE FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all of the Funds distributions are from investment company taxable income, except that the Fund has designated 72.64% of the distributions as net capital gain dividends. 18 GMO VALUE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGER Mr. Richard Mayo is responsible for the management of the GMO Value Fund. Mr. Mayo has been a portfolio manager with GMO since its founding in 1977 and began his career in the late 1960's. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Value Fund returned -8.5% for the fiscal year ended February 29, 2000, as compared to -3.3% for the Russell 1000 Value Index. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in common stocks throughout the period. In the past year the S&P 500 Index was up. Without technology (66 companies) the S & P 500 would have declined. [LOGO] During this same period the majority of stocks in the index were down. Investors left companies that are perceived to exist in the "Old Economy" (and therefore have limited future growth potential) in search of huge returns in companies that are revolutionizing the business landscape. This has been frustrating to money managers like ourselves that buy stocks that are not yet priced for very optimistic growth and profitability assumptions. We accept the fact that technology and the Internet are rapidly altering business practices and are great opportunities for some companies, and may diminish future profitability for those companies that do not adapt. We have tried to take advantage of the "technology revolution" in companies that would benefit before their potential was fully recognized. Our mistake was taking profits when we thought valuations were stretched or extreme. We bought the following: GMO VALUE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- Electronic Data Systems--An information outsourcer--bought it at $36 and sold at $60, 30x earnings. It is now at $70. Computer Sciences--The same business, bought at $55, sold at $80 and it went to $90. Corning--bought it at $35 before broadband became the hue and cry; it seemed reasonable to take profits at $100 and 50x earnings, but it went to $200. There are other examples, but you can see performance suffered from valuation disciplines during a time that investors were willing to pay for growth at any price. Performance was also impacted by our holdings of low-risk stocks--utilities, food companies, and REITs--that we held to provide a good return if technology valuations cracked. This happened in April and May of 1999 and the first week of this year, and these stocks did provide stability. The periods of outperformance were very short and not sufficient to keep pace. However, considering the average stock declined 40% from the peak in 1999 to February 2000 lows, they did preserve capital and have given us an opportunity to take advantage of some great opportunities that the "bifurcated market", NASDAQ up and the Dow down, has created. I want to spend the rest of this letter describing some of these situations, because in our opinion, they are so compelling and exciting. I shall divide these into several categories. Companies benefiting from the robust new economy--wireless, business-to-business and the demand for computing capability either directly or indirectly; regular businesses where profitability is improving dramatically due to the dramatic worldwide economic recovery; and stocks that have been unfairly penalized due to the fear that some of the Internet startups will take significant business from market leaders in certain industries. THE DIRECT BENEFICIARIES IBM--This is the e-commerce company at a 35% discount to the market due to the Y2K bump, but that is over. Compaq--Also impacted by the Y2K slowdown; selling at only 12-14 times earnings power if early indications of a turnaround continue. Unisys--After the fiscal year end we added--15x earnings with possibly the best Windows 2000 server entering the market in the second half. The opportunity exists because momentum investors prefer to wait until the acceleration is obvious. Pitney Bowes--The mailing process must go digital (Post Office mandate). This will stimulate revenues, and the company has a business to business niche that could grow rapidly. Companies with comparable potential sell at 30-40x earnings; Pitney Bowes is selling at only 17x earnings. AT&T--About to monetize its wireless assets. Wireless value $20 per share, cable business $25 per share, implying the rest of the company only has $12 value, far too low in our opinion. GMO VALUE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- Bell Atlantic--GTE--After the merger and including the joint venture with Vodafone Airtouch, will control the largest U.S. wireless network. Valuation: 18x 2000 earnings. Either the telephone operation has a very low valuation--not fair since revenues are accelerating--or you can buy wireless at a huge discount compared to independent companies. INDIRECT BENEFICIARIES Federated Department Stores--This company now has the largest Internet business among existing retailers and this business is growing rapidly. What do you pay for this growth? Nothing. The earnings multiple is 10x. Chase Manhattan--This company was early in the venture capital business and now has a portfolio of $7.9 billion. Street analysts think this alone is worth $30 billion and it sells at only a peer group multiple. Xerox--The stock dropped 64% last year due to disappointing sales and profits. The company did not manage its transition to the digital world very well. Now business has stabilized, and new business initiatives, such as their new printers (a full-fledged assault on Hewlett-Packard), and a rapidly growing product category may stimulate growth. The price--14x earnings. Toys R Us--The company now has the leading toy retailing website. This company is extremely undervalued, ignored, and unloved. Does management agree with our assessment? Well, they have announced a buyback of 35% of their stock. THIRTY-FIVE PERCENT. BOOMING ECONOMY BENEFICIARIES Energy stocks--Oil demand, due to the economic recovery, has reduced inventories to 10 year lows, dramatically reducing the probability that oil prices fall back to $20 per barrel, but the stocks are priced as though oil will drop below that level. Many are very inexpensive, but our favorite is Texaco. Priced at a discount to its peers, this is fair since it has a lower return on capital, but it gets no credit for its one billion+ barrel discovery off the coast of West Africa, which could add $10 per share to the company's asset value. What did the stock do? It dropped $10. This is an opportunity. International Paper--I disagree with management's recent actions; however, one should look at stocks that sell at 1982 prices. Pricing of their products has been rising, and most will continue to do so. Earnings estimates have doubled in the last year. Now the multiple is only 7x. Could there be some financial engineering in the future? Inco--This is the world's largest nickel producer. Nickel prices have doubled in the last year and could go higher. The second largest supplier is Russia, which is exporting less since their recovering economy is demanding more, and there is no new capacity on the horizon. Cash flow is surging, and we are optimistic that management will consider using some of this to repurchase stock. This is a new and growing position. GMO VALUE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- THE UNFAIRLY PENALIZED STOCKS CVS--Investors assumed the "dot com" startups would thwart growth and caused the stock to drop 50%. CVS is about to become the biggest Internet pharmacy. There has been no slowdown in growth, and at the bottom, we were able to buy 15% growth at 15x earnings. The company's recently announced $1 billion stock buyback has restored confidence, and the stock has rallied 25%. Safeway--The same story. Investors feared Webvan, the Internet grocer, would wreak havoc with their business. Webvan is smaller than one Safeway store. Safeway now has an Internet operation with a lower cost structure, and we are delighted with the stock's 50% rally. We have now shifted most of the position into Kroger, which was a late mover and is catching attention due to good comparable store sales improvement. Eastman-Kodak--Expected to be hurt by the new digital upstarts--now over one hundred--but none earn money and Kodak will outlast them. Its joint venture with AOL helps. The stock price is now at an all-time record low relative to the market at less than 10x this year's earnings. Too low for management to resist a major stock repurchase. THE EVERYDAY GROUP
GROWTH RATE MULTIPLE ----------- -------- Kimberly-Clark.............................................. 11 16 United Technology........................................... 15 17 H. & R. Block............................................... 15 15 Citigroup................................................... 15 19 Rockwell (New).............................................. 12 12
These companies have demonstrated improving business fundamentals, which could be recognized when the technology obsession subsides. Also note that United Technologies and Rockwell are leaders in B2B (business to business) developments in their industries. We are excited about the opportunities that the market divergence has created, and are optimistic that these are money making situations as we see more and more managements acting dramatically (major stock buybacks). Also, we see many of the companies today activated by the Internet potential so we are convinced the prevailing opinion, that "Old Economy" companies are losers in the future, is wrong. The real losers may be some of the newly created Internet operations. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO VALUE FUND CLASS FUND CLASS III SHARES AND THE RUSSELL 1000 VALUE INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 11/13/90 1yr 5yr 10yr (ITD) -8.58 15.09 15.29
[GRAPH]
Date GMO Value Fund-III Russell 1000 Value 11/13/90 9986 10000 12/31/90 10585 10394 3/31/91 12508 11755 6/30/91 12630 11767 9/30/91 12903 12392 12/31/91 13310 12953 3/31/92 13641 13099 6/30/92 14138 13647 9/30/92 14146 13929 12/31/92 14554 14742 3/31/93 15636 16166 6/30/93 16152 16640 9/30/93 16710 17462 12/31/93 17272 17415 3/31/94 16602 16806 6/30/94 16525 16910 9/30/94 17333 17340 12/31/94 17378 17065 3/31/95 19119 18686 6/30/95 20919 20361 9/30/95 22683 22140 12/31/95 24014 23610 3/31/96 25462 24946 6/30/96 26177 25375 9/30/96 26328 26114 12/31/96 28991 28719 3/31/97 29176 29454 6/30/97 33473 33797 9/30/97 37193 37161 12/31/97 37810 38823 3/31/98 42040 43345 6/30/98 42016 43540 9/30/98 37439 38491 12/31/98 42218 44883 3/31/99 42020 45527 6/30/99 47111 50660 9/30/99 42266 45699 12/31/99 43356 48181 2/29/00 37565 43147
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 14 bp on the purchase. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Tobacco-Free Core Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO Tobacco-Free Core Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ COMMON STOCKS -- 94.9% AEROSPACE -- 0.9% 28,500 Boeing Co 1,050,937 5,300 General Dynamics Corp 229,225 48,200 Lockheed Martin Corp 840,487 14,300 Northrop Grumman Corp 649,756 ------------ 2,770,405 ------------ AUTOMOTIVE -- 3.8% 45,900 Autonation Inc* 347,119 15,800 Dana Corp 336,737 10,000 Eaton Corp 749,375 77,700 Ford Motor Co 3,234,262 79,500 General Motors Corp 6,046,969 4,700 General Motors Corp, Class H* 566,350 11,900 Genuine Parts Co 268,494 33,800 Goodyear Tire & Rubber Co 766,837 ------------ 12,316,143 ------------ BANKING AND FINANCIAL SERVICES -- 12.1% 10,100 American Express Co 1,355,294 9,800 Amsouth Bancorp 142,100 106,164 Bank of America Corp 4,890,179 5,800 BB&T Corp 136,300 19,221 Bear Stearns Cos Inc 754,424 46,600 Chase Manhattan Corp 3,710,525 155,922 Citigroup Inc 8,059,218 19,500 Countrywide Credit Industries Inc 486,281 8,200 Donaldson Lufkin & Jenrette 356,187 44,600 Fannie Mae 2,363,800 2,000 Fifth Third Bancorp 104,125 52,200 Firstar Corp 929,812 12,000 Fleet Boston Financial Corp 327,000 23,000 Franklin Resources Inc 625,312 41,200 Freddie Mac 1,720,100 23,200 Golden West Financial Corp 661,200 9,400 Greenpoint Financial Corp 149,812 23,200 Household International Inc 740,950 16,400 J.P. Morgan & Co Inc 1,820,400 15,700 Lehman Brothers Holding Inc 1,138,250
See accompanying notes to the financial statements. 1 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ BANKING AND FINANCIAL SERVICES -- CONTINUED 300 M & T Bank Corp 110,700 66,600 MBNA Corp 1,515,150 34,000 Merrill Lynch 3,485,000 19,300 MGIC Investment Corp 721,337 16,700 Morgan Stanley Dean Witter & Co 1,176,306 3,800 Old Kent Financial Corp 99,512 18,100 Paine Webber Group Inc 692,325 6,400 Summit Bancorp 153,200 8,700 UnionBanCal Corp 279,487 8,700 Wells Fargo & Co 287,644 ------------ 38,991,930 ------------ CHEMICALS -- 1.3% 22,600 Air Products and Chemicals 581,950 7,400 Du Pont (E.I.) De Nemours 373,700 8,400 Eastman Chemical Co 301,875 9,400 PPG Industries Inc 464,125 21,200 Praxair Inc 715,500 9,058 Rohm & Haas Co 365,717 17,700 Sherwin Williams Co 338,512 21,200 Union Carbide Corp 1,138,175 ------------ 4,279,554 ------------ COMPUTER AND OFFICE EQUIPMENT -- 10.0% 59,400 Cisco Systems Inc* 7,851,937 15,400 Computer Associates International Inc 990,412 3,900 Electronic Data Systems Corp 252,525 15,500 Gateway Inc* 1,065,625 18,900 Hewlett Packard Co 2,542,050 26,400 IBM Corp 2,692,800 7,600 Micron Technology Inc* 745,275 216,500 Oracle Corp* 16,075,125 ------------ 32,215,749 ------------ CONSTRUCTION -- 0.5% 20,900 Georgia-Pacific Corp 724,969 12,750 Home Depot Inc 737,109 ------------ 1,462,078 ------------
See accompanying notes to the financial statements. 2 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CONSUMER GOODS -- 1.2% 16,800 Eastman Kodak Co 962,850 13,400 Fortune Brands Inc 293,125 7,400 Johnson Controls 394,975 64,300 Mattel Co 618,887 14,500 Nike Inc, Class B 412,344 4,600 Procter and Gamble Co 404,800 12,700 VF Corp 313,531 7,100 Whirlpool Corp 385,619 ------------ 3,786,131 ------------ ELECTRONIC EQUIPMENT -- 10.4% 13,100 Analog Devices Inc* 2,056,700 28,300 Emerson Electric Co 1,289,419 23,600 General Electric Co 3,119,625 6,100 Jabil Circuit Inc* 423,569 6,600 Linear Technology Corp 692,587 33,800 LSI Logic Corp* 2,165,312 28,400 Motorola Inc 4,842,200 16,900 National Semiconductor Corp* 1,269,612 50,100 Nortel Networks Corp 5,586,150 27,300 Qualcomm Inc* 3,888,544 26,200 Raytheon Co, Class B 484,700 10,400 Tellabs Inc* 499,200 35,100 Texas Instruments Inc 5,844,150 14,900 Xilinx Inc* 1,188,275 ------------ 33,350,043 ------------ FOOD AND BEVERAGE -- 1.4% 11,600 Anheuser Busch Cos Inc 743,850 44,335 Archer Daniels Midland Co 446,121 3,500 Bestfoods 146,781 3,300 Heinz (HJ) Co 105,394 51,800 Nabisco Group Holdings 446,775 30,800 Seagrams Co Ltd 1,809,500 8,100 Sysco Corp 265,781 10,300 Tyson Food Inc, Class A 106,219 8,800 Wrigley (William Jr) Co 595,100 ------------ 4,665,521 ------------
See accompanying notes to the financial statements. 3 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ HEALTH CARE -- 2.5% 58,700 Columbia HCA Healthcare Corp 1,133,644 39,200 Johnson & Johnson 2,812,600 7,300 Pharmacia & Upjohn Inc 347,662 11,600 Stryker Corp 678,600 41,500 Tenet Healthcare Corp* 726,250 35,700 United Healthcare Corp 1,825,162 8,900 Wellpoint Health Network* 600,750 ------------ 8,124,668 ------------ INSURANCE -- 3.5% 17,700 Aetna Life and Casualty Co 727,912 7,100 Allmerica Financial Corp 296,425 75,600 Allstate Corp 1,474,200 8,300 AMBAC Inc 364,681 14,700 American General Corp 767,156 24,000 AXA Financial Inc 718,500 18,300 Chubb Corp 900,131 15,100 Cigna Corp 1,114,569 8,400 CNA Financial Corp* 226,800 44,566 Conseco Inc 651,778 26,500 Hartford Financial Services Group Inc 828,125 3,800 Jefferson Pilot Corp 197,837 15,500 Lincoln National Corp 431,094 13,700 MBIA Inc 525,737 10,200 ReliaStar Financial Corp 284,962 26,300 Saint Paul Cos Inc 588,462 13,000 Torchmark Corp 257,562 13,100 Travelers Property Casualty Corp, Class A 414,287 25,700 Unumprovident Corp 343,737 ------------ 11,113,955 ------------ MACHINERY -- 1.9% 20,600 Applied Materials Inc* 3,768,512 20,300 Baker Hughes Inc 525,263 11,400 Caterpillar Inc 399,713 26,700 Deere and Co 954,525 4,800 Dover Corp 185,100 9,700 Parker-Hannifin Corp 351,625 ------------ 6,184,738 ------------
See accompanying notes to the financial statements. 4 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ MANUFACTURING -- 2.0% 17,500 Corning Inc 3,290,000 15,600 Leggett & Platt Inc 262,275 16,700 Minnesota Mining and Manufacturing Co 1,471,688 20,400 Owens Illinois Inc* 281,775 19,200 Rockwell International Corp 868,800 7,700 Temple Inland Inc 393,663 ------------ 6,568,201 ------------ METALS AND MINING -- 0.8% 21,600 Alcan Aluminum Ltd 712,800 22,100 Phelps Dodge Corp 1,041,463 10,400 Reynolds Metals Co 660,400 ------------ 2,414,663 ------------ OIL AND GAS -- 4.4% 11,300 Amerada Hess Corp 571,356 35,400 Atlantic Richfield Co 2,513,400 17,600 Burlington Resources Inc 486,200 11,900 Chevron Corp 888,781 12,300 Columbia Energy Group 725,700 31,500 Diamond Offshore Drilling Inc 1,000,125 53,877 Exxon Mobil Corp 4,057,612 4,600 Kerr-McGee Corp 205,850 30,900 Occidental Petroleum Corp 496,331 17,600 Phillips Petroleum Co 673,200 26,900 Texaco Inc 1,276,069 10,500 Unocal Corp 280,875 31,700 USX - Marathon Group 685,513 2,600 Vastar Resources Inc 137,963 ------------ 13,998,975 ------------ PAPER AND ALLIED PRODUCTS -- 1.1% 16,300 Champion International Corp 843,525 24,895 International Paper Co 916,447 10,100 Kimberly-Clark Corp 522,044 16,200 Mead Corp 484,988 10,700 Weyerhaeuser Co 549,044 10,700 Willamette Industries Inc 363,131 ------------ 3,679,179 ------------
See accompanying notes to the financial statements. 5 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ PHARMACEUTICALS -- 3.5% 96,500 Abbott Laboratories 3,160,375 65,900 Amgen Inc* 4,493,556 36,800 Bristol Myers Squibb Co 2,090,700 8,500 Immunex Corp* 1,678,219 ------------ 11,422,850 ------------ PRIMARY MATERIALS -- 0.0% 8,900 Crown Cork & Seal Inc 124,600 ------------ PRIMARY PROCESSING -- 0.8% 15,500 Alcoa Inc 1,061,750 5,700 Dow Chemical Co 618,450 19,600 Nucor Corp 973,875 ------------ 2,654,075 ------------ PRINTING AND PUBLISHING -- 0.5% 5,500 Gannett Co Inc 358,531 9,600 Knight Ridder Inc 450,000 12,800 Tribune Co 498,400 300 Washington Post Co, Class B 146,325 ------------ 1,453,256 ------------ REFINING -- 1.2% 60,100 Royal Dutch Petroleum Co 3,155,250 21,600 Tosco Corp 577,800 ------------ 3,733,050 ------------ RETAIL TRADE -- 3.6% 68,476 Albertsons Inc 1,677,662 24,300 Autozone Inc* 596,869 12,900 Circuit City Stores Inc 520,838 29,100 Federated Department Stores Inc* 1,067,606 111,500 Kmart Corp* 982,594 25,600 May Department Stores Co 670,400 22,500 McDonald's Corp 710,156 21,800 Penney (JC) Co Inc 343,350 15,000 Safeway Inc* 578,438 58,500 Sears Roebuck & Co 1,612,406
6 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ RETAIL TRADE -- CONTINUED 12,600 Tandy Corp 479,588 11,900 Tiffany & Co 763,831 60,500 Toys R Us Inc* 748,688 16,600 Wal Mart Stores Inc 808,213 ------------ 11,560,639 ------------ SERVICES -- 1.0% 31,000 Cendant Corp* 552,188 4,300 FedEx Corp* 150,231 12,100 Fluor Corp 344,094 13,300 Marriott International Inc, Class A 366,581 31,800 The Walt Disney Co. 1,065,300 9,800 Time Warner Inc 837,900 ------------ 3,316,294 ------------ TECHNOLOGY -- 10.6% 57,000 BMC Software Inc* 2,622,000 19,200 First Data Corp 864,000 7,200 Grainger (WW) Inc 308,250 46,100 Honeywell International Inc 2,218,563 79,300 Intel Corp 8,960,900 11,900 JDS Uniphase Corp* 3,137,138 20,000 Microsoft Corp* 1,787,500 11,000 PE Corp - PE Biosystems Group 1,160,500 47,600 Seagate Technology Corp* 2,374,050 23,700 Solectron Corp* 1,552,350 74,400 Sun Microsystems Inc* 7,086,600 23,900 Teradyne Inc* 2,079,300 ------------ 34,151,151 ------------ TELECOMMUNICATIONS -- 10.1% 5,800 Alltel Corp 336,400 223,532 AT & T Corp 11,050,863 16,600 AT & T Liberty Media Group* 867,350 42,186 Bell Atlantic Corp 2,064,477 36,400 Bellsouth Corp 1,483,300 21,000 CBS Corp* 1,250,813 51,400 GTE Corp 3,032,600 50,638 MCI Worldcom Inc* 2,259,721
See accompanying notes to the financial statements. 7 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ TELECOMMUNICATIONS -- CONTINUED 10,800 MediaOne Group Inc* 847,800 11,400 Nextel Communications Inc, Class A* 1,558,950 87,914 SBC Communications Inc 3,340,732 20,900 Sprint Corp 1,274,900 6,200 Telephone and Data Systems Inc 654,100 4,600 United States Cellular Corp* 307,913 6,600 US West Inc 479,325 32,200 Viacom Inc, Class B* 1,795,150 ------------ 32,604,394 ------------ TRANSPORTATION -- 1.8% 24,100 AMR Corp* 1,274,288 57,800 Burlington Northern Santa Fe Railroad Co 1,137,938 23,700 CSX Corp 525,844 14,800 Delta Air Lines Inc 675,250 27,200 Norfolk Southern Corp 368,900 18,800 UAL Corp* 916,500 24,900 Union Pacific Corp 946,200 ------------ 5,844,920 ------------ UTILITIES -- 4.0% 2,200 AES Corp* 184,387 9,100 Allegheny Energy Inc 236,031 15,500 Ameren Corp 465,000 9,700 American Electric Power Inc 272,813 32,200 Central & South West Corp 541,363 9,100 Cinergy Corp 194,513 19,500 Coastal Corp 820,219 6,400 Consolidated Edison Inc 176,400 21,100 Constellation Energy Group Inc 627,725 16,000 Dominion Resources Inc 587,000 30,000 DTE Energy Co 905,625 13,800 Edison International 363,113 10,900 El Paso Energy Corp 403,981 57,300 Entergy Corp 1,160,325 23,000 Firstenergy Corp 429,813 2,900 Florida Progress Corp 123,613 7,300 FPL Group Inc 281,963 25,600 General Public Utilities Inc 636,800
8 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- UTILITIES -- CONTINUED 10,400 Keyspan Corp 211,900 12,800 New Century Energies Inc 346,400 1,800 New England Electric System 97,200 15,400 Niagara Mohawk Holdings Inc* 180,950 8,600 Northern States Power Co 151,038 22,000 PG & E Corp 453,750 5,400 Pinnacle West Capital Corp 149,175 6,400 Potomac Electric Power Co 130,000 14,100 PPL Corp 283,763 25,600 Public Service Enterprise Group Inc 742,400 7,200 Reliant Energy Inc 148,050 3,000 Southern Co 66,563 5,800 Teco Energy Inc 104,400 33,400 Texas Utilities Co 1,089,675 4,600 Unicom Corp 173,938 ------------- 12,739,886 ------------- TOTAL COMMON STOCKS (COST $296,954,528) 305,527,048 ------------- SHORT-TERM INVESTMENTS -- 7.6% CASH EQUIVALENTS -- 2.7% $ 685,384 BankBoston Eurodollar Time Deposit, 6.1175%, due 4/28/00(a) 685,384 $ 645,024 First Union National Bank Time Deposit, 5.8125%, due 3/01/00(a) 645,024 $ 967,537 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(a) 967,537 3,276,589 Merrimac Cash Fund Premium Class(a) 3,276,589 $ 3,000,000 Prudential Securities Group, Inc. Master Note, 6.1875%, due 3/10/00(a) 3,000,000 ------------- 8,574,534 ------------- U.S. GOVERNMENT -- 0.8% $ 2,760,000 U.S. Treasury Bill, 5.689%, due 6/29/00(b) 2,708,388 -------------
See accompanying notes to the financial statements. 9 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 4.1% $ 13,111,484 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $13,113,287 and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest, of $13,373,714. 13,111,484 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $24,395,786) 24,394,406 ------------- TOTAL INVESTMENTS -- 102.5% (Cost $321,350,314) 329,921,454 Other Assets and Liabilities (net) -- (2.5%) (8,135,760) ------------- TOTAL NET ASSETS -- 100.0% $ 321,785,694 ============= NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Represents investments of security lending collateral (Note 1). (b) Security has been segregated to cover margin requirements on open financial futures contracts. 10 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $321,350,314) (Note 1) $329,921,454 Dividends and interest receivable 486,956 Receivable for variation margin on open futures contracts (Notes 1 and 6) 109,350 Receivable for expenses waived or borne by Manager (Note 2) 5,825 ------------ Total assets 330,523,585 ------------ LIABILITIES: Payable upon return of securities loaned (Note 1) 8,574,534 Payable to affiliate for (Note 2): Management fee 83,712 Shareholder service fee 38,050 Accrued expenses 41,595 ------------ Total liabilities 8,737,891 ------------ NET ASSETS $321,785,694 ============ NET ASSETS CONSIST OF: Paid-in capital $301,127,355 Accumulated undistributed net investment income 774,890 Accumulated net realized gain 11,406,835 Net unrealized appreciation 8,476,614 ------------ $321,785,694 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $321,785,694 ============ SHARES OUTSTANDING: Class III 22,424,824 ============ NET ASSET VALUE PER SHARE: Class III $ 14.35 ============
See accompanying notes to the financial statements. 11 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $9,290) $ 3,292,950 Interest (including securities lending income of $24,068) 1,417,122 ----------- Total income 4,710,072 ----------- EXPENSES: Management fee (Note 2) 855,754 Custodian and transfer agent fees 86,279 Audit fees 34,851 Legal fees 6,479 Trustees fees (Note 2) 3,009 Registration fees 2,107 Miscellaneous 2,833 Fees waived or borne by Manager (Note 2) (135,558) ----------- 855,754 Shareholder service fee (Note 2) Class III 388,979 ----------- Net expenses 1,244,733 ----------- Net investment income 3,465,339 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 40,468,811 Closed futures contracts 3,002,730 Closed swap contracts (1,012,894) ----------- Net realized gain 42,458,647 ----------- Change in net unrealized appreciation (depreciation) on: Investments (11,292,493) Open futures contracts 125,762 Open swap contracts 173,044 ----------- Net unrealized loss (10,993,687) ----------- Net realized and unrealized gain 31,464,960 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $34,930,299 ===========
12 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 3,465,339 $ 1,799,442 Net realized gain 42,458,647 12,285,912 Change in net unrealized appreciation (depreciation) (10,993,687) 2,331,870 ------------ ------------ Net increase in net assets from operations 34,930,299 16,417,224 ------------ ------------ Distributions to shareholders from: Net investment income Class III (3,120,661) (1,592,308) ------------ ------------ Total distributions from net investment income (3,120,661) (1,592,308) ------------ ------------ Net realized gains Class III (34,891,112) (15,222,676) ------------ ------------ Total distributions from net realized gains (34,891,112) (15,222,676) ------------ ------------ (38,011,773) (16,814,984) ------------ ------------ Net share transactions: (Note 5) Class III 97,708,683 127,633,807 ------------ ------------ Increase in net assets resulting from net share transactions 97,708,683 127,633,807 ------------ ------------ Total increase in net assets 94,627,209 127,236,047 NET ASSETS: Beginning of period 227,158,485 99,922,438 ------------ ------------ End of period (including accumulated undistributed net investment income of $774,890 and $430,212, respectively) $321,785,694 $227,158,485 ============ ============
See accompanying notes to the financial statements. 13 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, --------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- ------- ------- ------- NET ASSET VALUE, BEGINNING OF PERIOD $ 14.26 $ 14.05 $ 12.98 $ 12.93 $ 10.65 -------- -------- ------- ------- ------- Income from investment operations: Net investment income 0.20 0.18 0.22 0.24 0.28 Net realized and unrealized gain 1.94 1.99 4.07 2.41 3.71 -------- -------- ------- ------- ------- Total from investment operations 2.14 2.17 4.29 2.65 3.99 -------- -------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.19) (0.19) (0.22) (0.24) (0.25) From net realized gains (1.86) (1.77) (3.00) (2.36) (1.46) -------- -------- ------- ------- ------- Total distributions (2.05) (1.96) (3.22) (2.60) (1.71) -------- -------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 14.35 $ 14.26 $ 14.05 $ 12.98 $ 12.93 ======== ======== ======= ======= ======= TOTAL RETURN(a) 15.10% 16.29% 37.82% 22.76% 38.64% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $321,786 $227,158 $99,922 $66,260 $57,485 Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48% 0.48% Net investment income to average daily net assets 1.34% 1.35% 1.66% 1.83% 2.25% Portfolio turnover rate 108% 77% 70% 131% 81% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.03 $ 0.04 $ 0.04 $ 0.03
(a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. 14 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Tobacco-Free Core Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in U.S. equity securities. The Fund's benchmark is the S&P 500 Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an 15 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund loaned securities having a market value of $8,366,490, collateralized by cash in the amount of $8,574,534, which was invested in short-term instruments. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund enters into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The Fund also enters into contracts for 16 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 29, 2000, there were no open swap agreements. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. 17 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .14% of the amount invested. All purchase premiums are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $156,532 in purchase premiums. There is no premium for redemptions, reinvested distributions or in-kind transactions. Effective April 7, 2000, the Fund will no longer charge a purchase premium. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .50% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeded .33% of average daily net assets. 18 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $3,009. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $339,310,987 and $247,020,354, respectively. At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $322,628,917 $43,971,347 $(36,678,810) $7,292,537
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 57.0% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ------------------------ ----------------------- Shares Amount Shares Amount Class III: ---------- ------------ --------- ------------ Shares sold 8,011,905 $123,086,297 8,174,912 $118,663,463 Shares issued to shareholders in reinvestment of distributions 2,549,261 37,093,513 1,181,509 16,525,109 Shares repurchased (4,062,483) (62,471,127) (544,280) (7,554,765) ---------- ------------ --------- ------------ Net increase 6,498,683 $ 97,708,683 8,812,141 $127,633,807 ========== ============ ========= ============
19 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FUTURES CONTRACTS
Number of Contract Net Unrealized Contracts Type Expiration Date Value Depreciation ---------- ---------- --------------- ---------- -------------- Buys 18 S&P 500 March 2000 6,174,000 $(94,526) ========
At February 29, 2000, the Fund has sufficient cash and/or securities to cover any commitments or margin on open futures contracts. 20 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 64.7% of distributions as net capital gain dividends. 21 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are primarily responsible for the day-to-day management of the Fund's portfolio. Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Tobacco-Free Core Fund returned 15.1% for the fiscal year ended February 29, 2000, as compared to 11.7% for the S&P 500. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in common stocks throughout the period. For the fiscal year, narrow market conditions persisted despite a brief broadening in the market in the second quarter. U.S. market returns were dominated by technology and telecommunications stocks. Growth stocks across all market capitalization bands outperformed value stocks. Sector selection was neutral relative to the benchmark. The Fund's underweight in consumer staple (particularly food and beverage) stocks added 190 basis points as these stocks underperformed the benchmark by 35% for the fiscal year. The underweight positions in financial services and health care stocks, also poor performers, added modestly to performance. The exclusion of tobacco stocks, which underperformed the benchmark by 56% during the period, also contributed positively to performance. These positive contributions were offset by an overweight position in value stocks, including auto/transportation stocks and electric utilities. These positions detracted -200 basis points in aggregate from performance. Stock selection added value. Selection was particularly strong in technology, pharmaceutical and producer durable stocks. Weak selection among telephone utility, financial services, consumer staple and consumer durable stocks detracted from performance. The MOMENTUM stock selection strategy performed well. The INTRINSIC VALUE strategy was neutral relative to the benchmark, while the NEGLECT, BOOK VALUE and CASH FLOW strategies underperformed. OUTLOOK The portfolio is conservatively positioned, with a lower price-to-book, lower price-to-earnings and a higher dividend yield than the S&P 500. In our view, value stocks are significantly undervalued compared to growth stocks. The spread of value stocks relative to growth stocks is at its widest level since the early 1970's. The Fund is overweight in both auto/transportation stocks and electric utilities, reflecting our preference for value stocks. We are gradually reducing our exposure to technology stocks. While earlier in 1999 many of these stocks were attractive to our intrinsic value methodology, most technology stocks have appreciated to a point where they are now expensive on this measure. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO TOBACCO-FREE CORE FUND CLASS III SHARES AND THE S&P 500 INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 10/31/91 1yr 5yr 10yr (ITD) 14.94 25.64 19.8
[GRAPH]
Date GMO Tobacco Free Core Fund-III S&P 500 10/31/91 9986 10000 12/31/91 10648 10695 3/31/92 10327 10426 6/30/92 10639 10625 9/30/92 10771 10960 12/31/92 11254 11512 3/31/93 12039 12015 6/30/93 12340 12074 9/30/93 12997 12385 12/31/93 13214 12673 3/31/94 12852 12191 6/30/94 12889 12243 9/30/94 13379 12841 12/31/94 13530 12840 3/31/95 14785 14090 6/30/95 16386 15435 9/30/95 18132 16661 12/31/95 19349 17664 3/31/96 20057 18613 6/30/96 20744 19446 9/30/96 21351 20049 12/31/96 22889 21720 3/31/97 23473 22302 6/30/97 27315 26196 9/30/97 30640 28158 12/31/97 31038 28967 3/31/98 35284 33007 6/30/98 36144 34096 9/30/98 32527 30705 12/31/98 38859 37244 3/31/99 40865 39099 6/30/99 43755 41856 9/30/99 40864 39242 12/31/99 47117 45079 2/29/00 45105 42004
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 14 bp on the purchase. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO TAX MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Tax-Managed Small Companies Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for the period from June 1, 1999 (commencement of operations) to February 29, 2000, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at February 29, 2000 by correspondence with the custodian, provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- COMMON STOCKS -- 94.8% AEROSPACE -- 0.3% 500 Curtiss Wright Corp 18,500 1,000 Fairchild Corp, Class A* 6,125 5,700 Kaman Corp, Class A 56,644 5,600 Kellstrom Industries Inc* 38,850 ------------- 120,119 ------------- AUTOMOTIVE -- 1.3% 6,700 Arvin Industries Inc 123,112 600 Bandag Inc 14,100 800 Borg Warner Automotive Inc 25,600 1,900 Cooper Tire & Rubber Co 20,544 7,000 Dura Automotive Systems Inc* 91,437 1,500 Meritor Automotive Inc 21,000 1,000 Modine Manufacturing Co 22,812 1,400 Smith (AO) Corp, Class B 24,150 800 Superior Industries International Inc 19,100 3,100 Titan International Inc 22,862 12,400 United Automotive Group Inc* 103,850 2,300 Wabash National Corp 32,200 ------------- 520,767 ------------- BANKING AND FINANCIAL SERVICES -- 8.0% 5,000 Acceptance Insurance Cos Inc* 20,625 12,000 Advanta Corp, Class A 223,500 36,600 Amresco Inc* 50,325 1,100 Andover Bancorp Inc 29,425 5,100 Astoria Financial Corp 121,444 100 Bancfirst Corp 2,775 2,200 Bancwest Corp 33,412 3,200 Bay View Capital Corp 28,000 1,800 BSB Bancorp Inc 32,287 1,200 Charter Municipal Mortgage Acceptance 14,325 4,600 Commercial Federal Corp 59,512 1,200 Corus Bancshares Inc 29,550 100 CPB Inc 2,250 3,600 Credit Acceptance Corp* 19,800 500 Dain Rauscher Corp 28,187 6,300 Downey Financial Corp 124,031
See accompanying notes to the financial statements. 1 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- BANKING AND FINANCIAL SERVICES -- CONTINUED 2,400 Edwards (AG) Inc 76,050 800 First Bancorp Puerto Rico 13,600 2,600 First Citizens Bancshares, Class A 167,700 1,000 First Commerce Bancshares Inc, Class A 34,750 1,100 First Federal Financial Corp* 14,025 500 First Indiana Corp 10,125 3,000 First Republic Bank* 45,750 4,000 Flagstar Bancorp Inc 51,500 4,100 GBC Bancorp (California) 110,700 3,300 Hamilton Bancorp Inc* 55,069 7,500 Hibernia Corporation, Class A 67,969 7,800 Imperial Credit Industries Inc* 44,850 1,000 Interwest Bancorp Inc 17,500 4,700 Jefferies Group Inc 109,862 3,500 Leucadia National Corp 74,812 7,400 Liberty Financial Cos 142,912 700 Midland Co 15,750 1,200 Morgan Keegan Inc 17,100 800 North Fork Bancorp 13,100 20,800 Ocwen Financial Corp* 123,500 12,300 Pacific Century Financial Corp 186,806 3,900 PFF Bancorp Inc 58,987 1,050 PMI Group Inc 38,128 1,600 Raymond James Financial Corp 31,600 17,800 Resource America Inc 125,712 11,200 Resource Bancshares Mortgage Group Inc 41,300 1,800 Ryland Group Inc 31,950 35,800 Sovereign Bancorp Inc 259,550 2,400 Student Loan Group 93,300 4,900 U.S. Bancorp Inc 48,081 2,860 UMB Financial Corp 96,167 500 Value Line Inc 17,937 6,500 Westcorp 83,281 ------------- 3,138,871 ------------- CHEMICALS -- 1.1% 5,600 Cytec Industries Inc* 135,800 1,600 IMC Global Inc 21,600 6,600 Mississippi Chemical Corp 49,500 1,500 Olin Corp 23,250
2 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CHEMICALS -- CONTINUED 700 Omnova Solutions Inc 4,594 900 Stepan Co 18,450 23,700 Terra Industries Inc 54,806 6,900 Wellman Inc 128,512 ------------- 436,512 ------------- COMPUTER AND OFFICE EQUIPMENT -- 2.6% 700 Micros Systems Inc* 38,762 28,000 Neomagic Corp* 151,376 7,500 Reynolds & Reynolds Inc, Class A 207,187 17,500 Sterling Software Inc* 627,812 ------------- 1,025,137 ------------- CONSTRUCTION -- 2.5% 500 Centex Construction Products Inc 11,625 700 Centex Corp 13,781 3,600 Horton (DR) Inc 40,500 1,100 Kaufman & Broad Home Corp 21,037 300 MDC Holdings Inc 4,556 12,100 Pulte Corp 203,431 10,500 Texas Industries Inc 315,000 16,600 Toll Brothers Inc* 275,975 2,600 US Home Corp* 89,050 ------------- 974,955 ------------- CONSUMER GOODS -- 4.4% 700 Bassett Furniture Industries Inc 9,450 900 Brown Shoe Co Inc 9,450 15,500 Burlington Industries Inc* 43,594 2,200 Callaway Golf Co 26,400 25,100 CHS Electronics Inc* 21,962 3,500 Compucom Systems Inc* 15,750 1,775 CoorsTek Inc* 34,612 8,100 Daisytek International Corp* 185,794 700 Department 56 Inc* 9,887 600 Enesco Group Inc 4,350 11,200 Footstar Inc* 276,500 1,900 Gibson Greetings Inc* 15,319 1,100 Hon Industries Inc 20,281
See accompanying notes to the financial statements. 3 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER GOODS -- CONTINUED 5,200 Kellwood Co 87,750 9,900 Kimball International, Class B 150,356 900 Lancaster Colony Corp 26,775 1,000 Liz Claiborne Inc 37,437 300 Mikasa Inc 2,737 900 Mohawk Industries Inc* 19,969 3,700 Natures Sunshine Products Inc 38,850 12,900 Nautica Enterprises Inc* 136,256 2,800 Oakley Inc* 24,150 600 Oxford Industries Inc 9,975 8,542 Pittston Brinks Group 152,688 1,000 Polo Ralph Lauren Corp* 16,750 2,100 Russell Corp 29,006 5,100 Standard Register Co 69,487 4,600 Tech Data Corp* 99,762 7,700 Unifi Inc* 73,631 2,400 US Industries Inc 27,450 1,200 Wallace Computer Services 12,525 1,900 Wolverine World Wide Inc 21,850 ------------- 1,710,753 ------------- ELECTRONIC EQUIPMENT -- 9.7% 6,300 3DFX Interactive Inc* 58,275 13,500 Arrow Electronics Inc* 408,375 7,500 Baldor Electric Co. 121,406 1,000 C-Cube Microsystems Inc* 93,250 8,600 Cable Design Technologies Corp* 198,875 2,600 Diebold Inc 63,700 200 Franklin Electric Inc 13,325 1,600 Genlyte Group Inc* 32,000 68,700 Glenayre Technologies Inc* 1,365,412 2,800 Harman International Industries 173,425 4,300 Hubbell Inc, Class B 104,544 4,200 Innovex Inc 39,637 14,200 Komag Inc* 31,507 400 Litton Industries * 11,975 8,200 Magnetek Inc* 70,725 900 Moog Inc, Class A* 16,087 3,300 Oak Technology Inc* 60,225 12,600 Picturetel Corp* 95,287
4 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- ELECTRONIC EQUIPMENT -- CONTINUED 16,000 Pioneer Standard Electronics Inc 294,000 2,400 Primex Technologies 50,400 21,800 Sensormatic Electronics Corp* 414,200 400 Thermo Ecotek Corp* 2,500 400 Thomas & Betts Corp 8,975 1,300 Triumph Group Inc* 38,025 ------------- 3,766,130 ------------- FOOD AND BEVERAGE -- 1.8% 1,600 Agribrands International Inc* 58,500 16,900 Bob Evans Farms Inc 229,206 1,600 Chiquita Brands International Inc 7,100 1,100 Corn Product International Inc 25,919 200 Farmer Brothers Co 32,000 15,900 IBP Inc 198,750 7,300 Imperial Sugar Co 19,619 600 International Multifoods Corp 6,562 800 Interstate Bakeries Corp 9,150 700 Luby's Cafeterias Inc 7,306 700 Michael Foods Inc 15,312 2,400 Ralcorp Holdings Inc* 35,850 900 Smithfield Foods Inc* 13,950 600 Suiza Foods Corp* 23,475 900 Universal Corp 14,737 1,200 Universal Foods Corp 21,675 ------------- 719,111 ------------- HEALTH CARE -- 3.8% 4,200 Alterra Healthcare Corp* 25,200 1,200 Apria Healthcare Group* 17,100 800 Arrow International Inc 31,600 16,000 Beverly Enterprises Inc* 42,000 600 Bindley Western Industries Inc 10,312 2,100 Coventry Health Care Inc* 17,194 700 Dentsply International Inc 17,937 27,200 Health Management Associates Inc* 292,400 18,400 Healthsouth Corp* 89,700 900 Invacare Corp 21,937 2,200 Lincare Holdings Inc* 51,562
See accompanying notes to the financial statements. 5 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 10,500 Magellan Health Services Inc* 61,687 1,200 Mallinckrodt Inc 29,550 7,700 Manor Care Inc* 66,894 1,100 Mentor Corp 30,525 2,200 Mid Atlantic Medical Services Inc* 18,012 900 Ocular Sciences Inc* 13,500 4,700 Pediatrix Medical Group Inc* 37,012 21,600 Phycor Inc* 24,976 33,900 PSS World Medical Inc* 218,231 11,100 Quorum Health Group Inc* 98,860 9,800 Sierra Health Services Inc* 60,025 3,800 Sola International Inc* 19,000 3,500 Steris Corp* 33,906 44,200 Total Renal Care Holdings* 132,600 900 Trigon Healthcare Inc* 28,744 ------------- 1,490,464 ------------- INDUSTRIAL -- 0.3% 5,800 Gerber Scientific Inc 97,150 ------------- INSURANCE -- 4.9% 910 ACE Ltd 16,266 900 American Financial Group Inc 18,900 700 American National Insurance Co 40,950 8,000 Amerus Life Holdings Inc 162,500 1,000 Argonaut Group Inc 19,000 4,500 Berkley (WR) Corp 72,281 800 Commerce Group Inc 23,900 1,836 Delphi Financial Group Inc* 48,424 1,300 Everest Re Group Ltd 31,931 3,300 Fidelity National Financial Inc 41,456 2,600 First American Financial Corp 30,225 1,700 Fremont General Corp 12,325 1,500 Frontier Insurance Group Inc 2,812 5,100 Harleysville Group Inc 66,619 800 Horace Mann Educators Corp 12,400 2,000 Kansas City Life Insurance Co 64,000 7,000 Landamerica Financial Group Inc 126,000 5,800 Mercury General Corp 131,587
6 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- INSURANCE -- CONTINUED 3,300 MMI Companies Inc 31,144 700 Mony Group Inc 20,037 300 National Western Life Insurance, Class A* 20,850 23,000 Ohio Casualty Corp 284,625 10,200 Old Republic International Corp 119,212 3,200 Pacificare Health Systems Inc* 145,400 300 PMA Capital Corp, Class A 5,550 1,200 Presidential Life Corp 18,750 700 PXRE Group Ltd 9,844 2,000 Radian Group Inc 69,375 2,800 Reliance Group Holdings Inc 12,425 600 RLI Corp 17,887 400 SCPIE Holdings Inc 12,625 6,600 Selective Insurance Group 101,887 5,400 Stewart Information Services Corp 73,912 400 Transatlantic Holding Inc 28,175 1,000 Trenwick Group Inc 13,187 ------------- 1,906,461 ------------- LODGING -- 0.2% 10,000 Boca Resorts Inc* 90,000 300 Boyd Gaming Corp* 1,556 ------------- 91,556 ------------- MACHINERY -- 1.9% 5,400 Agco Corp 59,400 4,998 Albany International Corp* 72,471 1,400 Cummins Engine Inc 46,637 11,600 Donaldson Co Inc 263,900 1,100 Federal Mogul Corp 14,987 7,200 Flowserve Corp 82,800 800 FMC Corp* 38,650 13,400 Harnischfeger Industries Inc* 10,050 300 IRI International Corp* 1,462 800 Kaydon Corp 18,400 1,300 Kennametal Inc 30,225 900 Milacron Inc 12,488 2,600 Paxar Corp* 25,838 600 Starrett (LS) Co, Class A 13,800
See accompanying notes to the financial statements. 7 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MACHINERY -- CONTINUED 500 Tecumseh Products Co 21,563 1,000 York International Corp 18,125 ------------- 730,796 ------------- MANUFACTURING -- 2.6% 7,100 ACX Technologies Inc* 22,631 1,700 Amcast Industrial Corp 20,294 600 Applied Power Inc, Class A 14,513 400 Armstrong World Industries Inc 7,600 800 Barnes Group Inc 11,350 1,300 Champion Enterprises Inc* 8,206 15,700 Clayton Homes Inc 127,563 1,400 Commercial Intertech Corp 25,200 1,600 Crane Co 31,800 15,500 Griffon Corp* 129,813 1,000 Harsco Corp 24,813 4,700 Hughes Supply Inc 84,013 355 Huttig Building Products Inc* 1,509 500 Lafarge Corp 9,844 13,300 Metals USA Inc* 103,075 700 NCI Building Systems Inc* 10,588 17,300 Omnicare Inc 158,944 1,000 Snap-On Inc 21,813 800 Standex International Corp 12,650 8,100 Trinity Industries Inc 179,213 ------------- 1,005,432 ------------- METALS AND MINING -- 1.2% 4,200 Arch Coal Inc 37,275 500 Cleveland Cliffs Inc 12,469 2,900 Commercial Metals Co 80,113 1,700 Nacco Industries Inc, Class A 73,844 2,800 Phelps Dodge Corp 131,950 5,250 Reliance Steel and Aluminum Co 101,719 1,600 Timken Co 22,900 ------------- 460,270 ------------- OIL AND GAS -- 9.3% 3,852 Friede Goldman International Inc* 20,223
8 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- OIL AND GAS -- CONTINUED 700 Helmerich & Payne Inc 18,638 45,600 Kinder Morgan Inc 1,271,100 16,500 Parker Drilling Co* 66,000 49,600 Pride International Inc* 734,700 700 Questar Corp 9,756 500 Seacor Smit Inc* 24,250 6,800 Tidewater Inc 192,525 24,800 Transocean Sedco Forex Inc 978,050 2,900 Varco International Inc* 32,081 13,900 Veritas DGC Inc* 278,000 ------------- 3,625,323 ------------- PAPER AND ALLIED PRODUCTS -- 1.6% 1,700 Boise Cascade Office Products* 25,288 900 Caraustar Industries Inc 14,963 4,557 Kimberly-Clark Corp 235,540 20,500 Mail-Well Inc* 178,094 3,500 Rock-Tenn Co, Class A 39,375 3,300 Schweitzer-Mauduit International 44,963 1,400 Shorewood Packaging Corp* 29,050 2,000 United Stationers Inc* 53,750 1,500 Wausau-Mosinee Paper Corp 19,594 ------------- 640,617 ------------- PHARMACEUTICALS -- 1.5% 15,700 Henry Schein Inc* 294,375 9,200 Mylan Laboratories Inc 211,600 3,300 NBTY Inc* 46,406 10,000 NCS Healthcare Inc, Class A* 22,813 ------------- 575,194 ------------- PRIMARY MATERIALS -- 0.0% 400 West Pharmaceutical Services Inc 11,775 ------------- PRIMARY PROCESSING -- 2.5% 5,400 AK Steel Holding Corp 44,888 500 Ameron Inc 17,438 900 Belden Inc 20,363 4,900 Bethlehem Steel Corp* 27,869
See accompanying notes to the financial statements. 9 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- PRIMARY PROCESSING -- CONTINUED 700 Carpenter Technology Corp 15,575 200 Intermet Corp 2,250 25,400 LTV Corp 84,138 18,800 National Steel Corp, Class B 131,600 500 NCH Corp 19,813 1,600 Oregon Steel Mills Inc 6,600 600 Precision Castparts Corp 15,488 800 Quanex Corp 17,050 1,000 Ryerson Tull Inc 13,250 3,708 Superior TeleCom Inc 46,350 1,600 Titanium Metals Corp 7,300 23,000 USX-US Steel Group Inc 503,125 ------------- 973,097 ------------- PRINTING AND PUBLISHING -- 0.4% 4,700 Hollinger International Inc 56,694 4,059 Quebecor Printing Inc 79,404 ------------- 136,098 ------------- REAL ESTATE -- 0.8% 1,400 Lennar Corp 23,100 16,600 Meristar Hospitality Corp, REIT 264,563 2,400 Webb (Del) Corp* 36,000 ------------- 323,663 ------------- REFINING -- 0.7% 5,000 Ashland Inc 155,625 4,000 Ultramar Diamond Shamrock Corp 86,750 1,200 Valero Energy Corp 30,600 ------------- 272,975 ------------- RETAIL TRADE -- 3.7% 6,400 Burlington Coat Factory Warehouse 73,200 9,200 CBRL Group Inc 85,100 8,400 Central Garden and Pet Co* 80,850 22,700 CKE Restaurants Inc 144,713 1,100 Claire's Stores Inc 19,181 7,100 Dress Barn Inc* 102,950
10 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- RETAIL TRADE -- CONTINUED 1,500 Finish Line Inc* 9,000 3,700 Fruit of the Loom Inc, Class A* 5,550 8,100 Goodys Family Clothing Inc* 56,700 10,600 Heilig Meyers Co 34,450 3,700 Homebase Inc* 9,481 2,700 Inacom Corp* 9,113 1,700 Ingles Markets Inc, Class A 18,594 600 Jo-ann Stores* 5,400 17,000 Just For Feet Inc* 1,360 28,500 Landry's Seafood Restaurants* 201,281 11,700 Lone Star Steakhouse and Saloon Inc* 103,838 1,500 Neiman Marcus Group Inc, Class A* 31,969 1,400 NPC International Inc* 11,550 4,800 Outback Steakhouse Inc* 125,400 600 Payless ShoeSource Inc* 23,700 1,600 Petco Animal Supplies Inc* 17,200 1,600 Phillips Van Heusen 11,100 4,400 Rainforest Cafe Inc* 17,600 2,400 Ross Stores Inc 34,800 900 Ruby Tuesday Inc 15,244 900 Ruddick Corp 12,094 8,700 Ryan's Family Steak Houses Inc* 83,194 600 Shopko Stores Inc* 9,975 2,900 Systemax Inc* 28,638 5,900 Value City Department Stores Inc* 77,806 ------------- 1,461,031 ------------- SERVICES -- 7.1% 2,200 Alternative Resources Corp* 7,425 700 Amerco* 11,988 1,300 Anchor Gaming* 54,113 12,400 Arctic Cat Inc 125,550 800 Avis Rent a Car Inc* 11,650 3,000 Aztar Corp* 28,500 4,400 Banta Corp 80,300 1,100 Berlitz International Inc* 16,913 1,600 Bowne and Co Inc 19,100 10,900 Buffets Inc* 94,694 700 Carmike Cinemas Inc, Class A* 5,469 1,800 CDI Corp* 32,850
See accompanying notes to the financial statements. 11 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- SERVICES -- CONTINUED 1,800 Dollar Thrifty Automotive Group Inc* 23,625 2,900 Electro Rent Corp* 31,538 18,125 Encompass Services Corp* 130,273 5,200 Family Golf Centers Inc* 6,500 18,900 Fleming Cos Inc 291,769 5,000 Franklin Covey Co* 40,938 2,100 Harrahs Entertainment Inc* 40,163 2,572 Hilton Hotels Corp 18,004 8,400 Ingram Micro Inc* 90,825 2,000 Interpool Inc 13,250 700 Jacobs Engineering Group* 19,644 4,800 Kelly Services, Class A 115,500 10,000 Loews Cineplex Entertainment Corp* 41,250 1,500 Manpower Inc 49,031 900 Marcus Corp 9,394 8,400 Modis Professional Services Inc* 132,300 1,500 Nash Finch Co 11,813 1,500 National Processing Inc* 13,219 3,800 Olsten Corp 45,363 9,700 Personnel Group of America Inc* 73,963 2,200 Prime Hospitality Corp* 18,700 1,500 Rollins Truck Leasing Corp 12,563 1,200 RWD Technologies Inc* 10,725 8,000 Safety-Kleen Corp* 39,000 1,900 Staff Leasing Inc* 10,925 30,300 Staffmark Inc* 340,875 14,829 Supervalu Inc 254,873 2,500 Unifirst Corp 25,156 22,300 Veterinary Centers of America Inc* 246,694 3,000 XTRA Corp* 119,438 ------------- 2,765,863 ------------- TECHNOLOGY -- 11.1% 4,200 Analysts International Corp 55,650 2,400 Aspen Technologies Inc* 107,400 1,200 Autodesk Inc 53,625 5,371 Avnet Inc 359,186 19,600 Cabletron Systems Inc* 960,400 900 Caci International Inc* 25,594 11,300 Cambridge Technology Partners Inc* 169,500
12 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 2,500 Cirrus Logic Corp* 52,031 29,700 Computer Horizons Corp* 660,825 5,700 Cotelligent Group Inc* 34,200 11,100 Deluxe Corp 260,156 3,900 Esterline Corp* 43,388 1,300 G TECH Holdings Corp* 26,000 8,200 Gartner Group Inc, Class A 117,363 2,900 Hypercom Corp* 50,206 3,200 Hyperion Solutions Corp* 158,000 10,000 Information Resources Inc* 78,125 5,200 Informix Corp* 83,200 4,700 Input/Output Inc* 28,494 11,100 Keane Inc* 266,400 9,900 Midway Games Inc* 146,644 1,700 MTS Systems Inc 13,069 4,500 Network Equipment Tech Inc* 47,250 5,000 Saga Systems Inc* 169,688 5,100 Solectron Corp* 334,050 1,200 Thermo Electron Corp* 18,750 ------------- 4,319,194 ------------- TELECOMMUNICATIONS -- 1.9% 12,000 Ameripath Inc* 118,500 37,400 Brightpoint Inc* 481,525 1,100 North Pittsburgh Systems 13,888 2,400 Star Telecommunications Inc* 14,400 4,500 West Teleservices* 88,875 1,800 World Access Inc* 34,200 ------------- 751,388 ------------- TEXTILES -- 0.5% 2,400 Cone Mills Corp* 9,450 1,800 Dan River Inc, Class A* 9,900 8,100 Guilford Mills 74,925 9,500 Interface Flooring Systems Inc 42,750 4,200 Pillowtex Corp 18,375 600 Springs Industries Inc, Class A 21,263 ------------- 176,663 -------------
See accompanying notes to the financial statements. 13 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- TRANSPORTATION -- 1.6% 800 Airborne Freight Corp 14,800 400 Alaska Air Group Inc* 10,600 1,100 America West Holdings Corp, Class B* 14,713 6,100 Brunswick Corp 107,894 6,300 Consolidated Freightways Corp* 41,738 700 Continental Airlines Inc, Class B* 22,138 1,200 Fleetwood Enterprises Inc 18,525 6,000 Fritz Companies Inc* 50,250 3,000 GATX Corp 93,375 1,400 Heartland Express Inc* 19,994 400 Landstar System Inc* 22,475 12,200 Offshore Logistics Inc* 121,238 3,200 Ryder System Inc 59,600 1,000 Yellow Corp* 16,000 ------------- 613,340 ------------- UTILITIES -- 5.5% 2,200 Alliant Energy Corp 61,875 6,100 Citizens Utilities, Class B* 93,025 8,500 CMP Group Inc 240,125 7,700 Connectiv Inc 109,725 2,500 El Paso Electric Co* 23,906 11,200 Hawaiian Electric Industries Inc 322,700 3,000 Niagara Mohawk Holdings Inc* 35,250 8,100 Oneok Inc 183,769 31,900 Public Service Co of New Mexico 490,463 2,500 Puget Sound Power and Light Co 50,781 15,400 RGS Energy Group Inc 303,188 1,100 Southwestern Energy Co 7,700 1,200 UniSource Energy Corp 16,200 1,100 United Illuminating Co 44,688 4,900 Utilicorp United Inc 80,238 100 Western Gas Resources Inc 1,375 4,700 Western Resources Inc 72,556 ------------- 2,137,564 ------------- TOTAL COMMON STOCKS (COST $39,591,846) 36,978,269 -------------
See accompanying notes to the financial statements. 14 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 4.5% REPURCHASE AGREEMENT -- 4.5% $ 1,764,383 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/01/00, with a maturity value of $1,764,625, and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19, and a market value, including accrued interest, of $1,799,670. 1,764,383 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $1,764,383) 1,764,383 ------------- TOTAL INVESTMENTS -- 99.3% (Cost $41,356,229) 38,742,652 Other Assets and Liabilities (net) -- 0.7% 257,307 ------------- TOTAL NET ASSETS -- 100.0% $ 38,999,959 ============= NOTES TO THE SCHEDULE OF INVESTMENTS:
REIT - Real Estate Investment Trust
* Non-income producing security. See accompanying notes to the financial statements. 15 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $41,356,229) (Note 1) $38,742,652 Receivable for investments sold 252,700 Dividends and interest receivable 55,943 Receivable for expenses waived or borne by Manager (Note 2) 2,023 ----------- Total assets 39,053,318 ----------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 16,695 Shareholder service fee 4,553 Accrued expenses 32,111 ----------- Total liabilities 53,359 ----------- NET ASSETS $38,999,959 =========== NET ASSETS CONSIST OF: Paid-in capital $42,188,144 Accumulated undistributed net investment income 65,701 Accumulated net realized loss (640,309) Net unrealized depreciation (2,613,577) ----------- $38,999,959 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $38,999,959 =========== SHARES OUTSTANDING: Class III 4,098,174 =========== NET ASSET VALUE PER SHARE: Class III $ 9.52 ===========
16 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- PERIOD FROM JUNE 1, 1999 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $85) $ 373,872 Interest 104,320 ----------- Total income 478,192 ----------- EXPENSES: Management fee (Note 2) 148,043 Audit fees 32,910 Custodian and transfer agent fees 19,300 Registration fees 1,117 Legal fees 810 Trustees fees (Note 2) 282 Miscellaneous 1,361 Fees waived or borne by Manager (Note 2) (55,780) ----------- Shareholder service fee (Note 2) 148,043 Class III 40,375 ----------- Net expenses 188,418 ----------- Net investment income 289,774 ----------- REALIZED AND UNREALIZED LOSS: Net realized loss on: Investments (358,571) Closed futures contracts (281,738) ----------- Net realized loss (640,309) ----------- Change in net unrealized appreciation (depreciation) on investments (2,613,577) ----------- Net realized and unrealized loss (3,253,886) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,964,112) ===========
See accompanying notes to the financial statements. 17 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD FROM JUNE 1, 1999 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 29, 2000 ---------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 289,774 Net realized loss (640,309) Change in net unrealized appreciation (depreciation) (2,613,577) ----------- Net decrease in net assets from operations (2,964,112) ----------- Distributions to shareholders from: Net investment income Class III (224,073) ----------- Total distributions from net investment income (224,073) ----------- Net share transactions: (Note 5) Class III 42,188,144 ----------- Increase in net assets resulting from net share transactions 42,188,144 ----------- Total increase in net assets 38,999,959 NET ASSETS: Beginning of period -- ----------- End of period (including accumulated undistributed net investment income of $65,701) $38,999,959 ===========
18 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JUNE 1, 1999 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 29, 2000 ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 ------- Income from investment operations: Net investment income 0.08 Net realized and unrealized loss (0.50) ------- Total from investment operations (0.42) ------- Less distributions to shareholders: From net investment income (0.06) ------- Total distributions (0.06) ------- NET ASSET VALUE, END OF PERIOD $ 9.52 ======= TOTAL RETURN(a) (4.25)%+ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $39,000 Net expenses to average daily net assets 0.70%* Net investment income to average daily net assets 1.08%* Portfolio turnover rate 18% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.01
(a) Calculation excludes purchase premiums. The total return would have been lower had certain expenses not been waived during the period shown. * Annualized. + Not annualized. See accompanying notes to the financial statements. 19 GMO TAX MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Tax Managed Small Companies Fund (the "Fund"), which commenced operations on June 1, 1999, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series into classes. The Fund seeks to maximize after-tax total return through investment in a portfolio of common stocks of smaller companies principally traded in the U.S. The Fund's benchmark is the Russell 2500 Index (After Tax). The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin 20 GMO TAX MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 29, 2000, the Fund held no open futures contracts. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund enters into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The Fund also enters into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 29, 2000 the Fund held no open swap agreements. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at 21 GMO TAX MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 22 GMO TAX MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .50% of the amount invested. All purchase premiums are paid to and recorded by the Fund as paid-in capital. For the period ended February 29, 2000, the Fund received $162,713 in purchase premiums. There is no premium for redemptions, reinvested distributions or in-kind transactions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .55% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the period ended February 29, 2000 was $282. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended February 29, 2000, aggregated $45,698,349 and $5,747,932, respectively. At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $41,356,229 $6,296,775 $(8,910,352) $(2,613,577)
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 76.9% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's outstanding shares. 23 GMO TAX MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from June 1, 1999 (commencement of operations) through February 29, 2000 ---------------------- Shares Amount Class III: --------- ----------- Shares sold 4,096,497 $42,171,883 Shares issued to shareholders in reinvestment of distributions 1,677 16,261 Shares repurchased -- -- --------- ----------- Net increase 4,098,174 $42,188,144 ========= ===========
The Fund was formed with a taxable contribution of securities in-kind, which had a market value of $620,625 on the date of contribution. 24 GMO TAX MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- At February 29, 2000 the Fund had a capital loss carryforward available to offset future capital gains, if any, of the following amount:
Year of Expiration Amount ------------------------------------------------------------ -------- 2008 $640,309
25 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are primarily responsible for the management of the Fund's portfolio. Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The GMO Tax-Managed Small Companies Fund returned -4.3% since its inception on June 1, 1999 to February 29, 2000. The Fund's benchmark, the Russell 2500 Index, returned 32.1% during the same period. On an after-tax basis, the Fund returned - -4.5% to the benchmark's 31.6% for the same period. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in U.S. equity securities throughout the period. From its inception, the Fund has focused on the least expensive stocks using price-to-book or price-to-fair value strategies, which we continue to expect will outperform when the market's enthusiasm for growth stocks subsides and more fundamentals-based market conditions prevail. This positioning proved detrimental during the partial year, as growth stocks outperformed value stocks by more than 85%, as represented by the Russell 2500 Growth and Russell 2500 Value Indices. Technology stocks were the driving force in the Russell 2500 Index return, posting a return of almost 190% for the nine-month period. Health care and producer durables also outperformed the benchmark for the partial year. These strong returns were able to mask negative returns during the period by the financial services, consumer staples, materials processing, automotive and transportation sectors, as well as stocks classified as other, which in combination account for approximately 35% of the benchmark. Within the Fund, a 5.9% underweight of technology stocks, was the primary source of relative underperformance within sector selection. Stock selection was also disappointingly weak during the nine-month period. The Fund's 25% overweight of stocks within the Russell 2500 Value Index and similar underweight of stocks within the Russell 2500 Growth Index worked against the Fund during the period, as did the tilt away from larger-capitalization stocks within the Index. Both stock selection strategies, price-to-fair value and price-to-book, were unsuccessful in adding value during the partial year. We expect these strategies to perform better in the current year. OUTLOOK We currently believe that low price-to-book stocks are as attractive as we've experienced in over twenty years, and we will be maintaining our exposure to these stocks over the coming months. We expect that the Fund's focused value orientation will work to the Fund's advantage when market expectations return to fundamentals-based valuations. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO TAX-MANAGED SMALL COMPANIES FUND CLASS III SHARES AND THE RUSSELL 2500 INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns* Inception 6/1/99 1yr 5yr 10yr (ITD) N/A N/A -4.73
[GRAPH]
Date GMO Tax Managed Small Companies Fund Russell 2500 6/1/99 9950 10000 6/30/99 10378 10556 9/30/99 9594 9875 12/31/99 9947 11817 2/29/00 9527 13212
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 50 bp on the purchase. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. * Returns are before taxes GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Tax-Managed U.S. Equities Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------- COMMON STOCKS -- 95.2% ADVERTISING -- 0.1% 400 Interpublic Group Inc 16,075 ----------- AEROSPACE -- 0.2% 200 Cordant Technologies Inc 6,475 700 Goodrich (BF) Co 16,756 ----------- 23,231 ----------- AUTOMOTIVE -- 0.6% 1,100 Autonation Inc* 8,319 100 Borg Warner Automotive Inc 3,200 139 Delphi Automotive Systems* 2,320 300 Eaton Corp 22,481 200 General Motors Corp 15,212 1,300 Genuine Parts Co 29,331 200 Lear Corp* 4,225 ----------- 85,088 ----------- BANKING AND FINANCIAL SERVICES -- 6.1% 1,900 American Express Co 254,956 565 Bank of America Corp 26,025 810 Bank One Corp 20,908 21 Berkshire Hathaway Inc, Class B* 30,240 700 Countrywide Credit Industries Inc 17,456 200 Fannie Mae 10,600 400 First Union Corp 11,800 836 Firstar Corp 14,891 1,200 Franklin Resources Inc 32,625 1,600 Key Corp 27,100 7,900 MBNA Corp 179,725 1,000 MGIC Investment Corp 37,375 1,100 Regions Financial Corp 22,275 200 Student Loan Group 7,775 22 Waddell and Reed Financial Inc, Class A 637 97 Waddell and Reed Financial Inc, Class B 2,631 3,500 Wells Fargo & Co 115,719 ----------- 812,738 -----------
See accompanying notes to the financial statements. 1 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------- CHEMICALS -- 0.8% 300 Eastman Chemical Co 10,781 1,100 Engelhard Corp 14,987 400 Ferro Corp 7,550 600 Great Lakes Chemical Corp 17,437 200 Minerals Technologies Inc 8,112 150 Octel Corp* 1,406 600 PPG Industries Inc 29,625 300 Rohm & Haas Co 12,112 ----------- 102,010 ----------- COMPUTER AND OFFICE EQUIPMENT -- 17.1% 7,500 Cisco Systems Inc* 991,406 400 Electronic Data Systems Corp 25,900 16,600 Oracle Corp* 1,232,550 800 Xerox Corp 17,350 ----------- 2,267,206 ----------- CONSUMER GOODS -- 0.7% 1,200 Fortune Brands Inc 26,250 450 Hasbro Inc 7,087 400 Jones Apparel Group Inc* 9,050 400 Lancaster Colony Corp 11,900 400 Nautica Enterprises Inc* 4,225 300 Newell Rubbermaid Inc 6,937 600 Nike Inc, Class B 17,062 600 VF Corp 14,812 ----------- 97,323 ----------- ELECTRONIC EQUIPMENT -- 13.9% 15,600 3 Com Corp* 1,528,800 600 AVX Corp 38,100 1,400 Emerson Electric Co 63,787 1,600 General Electric Co 211,500 ----------- 1,842,187 ----------- FOOD AND BEVERAGE -- 4.3% 1,000 Anheuser Busch Cos Inc 64,125 5,040 Archer Daniels Midland Co 50,715
2 See accompanying notes to the financial statements. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------- FOOD AND BEVERAGE -- CONTINUED 8,100 Pepsico Inc 261,225 500 Ralston-Purina Group 14,156 1,600 Seagrams Co Ltd 94,000 800 Universal Foods Corp 14,450 200 Whitman Corp 2,500 1,000 Wrigley (William Jr) Co 67,625 ----------- 568,796 ----------- HEALTH CARE -- 4.3% 300 Arrow International Inc 11,850 8,100 Columbia HCA Healthcare Corp 156,431 400 First Health Group Corp* 9,650 200 Hillenbrand Industries Inc 6,075 400 Invacare Corp 9,750 3,100 Johnson & Johnson 222,425 400 Lincare Holdings Inc* 9,375 300 Mallinckrodt Inc 7,387 700 Stryker Corp 40,950 426 Triad Hospitals Inc* 6,816 1,500 United Healthcare Corp 76,687 300 Wellpoint Health Network* 20,250 ----------- 577,646 ----------- INSURANCE -- 3.5% 200 AMBAC Inc 8,787 400 Hartford Financial Services Group Inc 12,500 500 Loews Corp 22,250 400 MBIA Inc 15,350 21,600 Old Republic International Corp 252,450 100 Progressive Corp 5,950 200 Safeco Corp 4,200 400 Saint Paul Cos Inc 8,950 800 Torchmark Corp 15,850 500 Transatlantic Holding Inc 35,219 2,600 Travelers Property Casualty Corp, Class A 82,225 ----------- 463,731 ----------- MACHINERY -- 0.4% 700 Deere and Co 25,025
See accompanying notes to the financial statements. 3 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------- MACHINERY -- CONTINUED 600 Donaldson Co Inc 13,650 200 FMC Corp* 9,662 ----------- 48,337 ----------- MANUFACTURING -- 1.0% 400 American Greetings Corp 6,900 1,000 Illinois Tool Works Inc 51,687 600 International Game Technology* 10,687 1,100 Leggett & Platt Inc 18,494 1,500 Owens Illinois Inc* 20,719 400 United Technologies Corp 20,375 ----------- 128,862 ----------- METALS AND MINING -- 0.4% 1,000 Phelps Dodge Corp 47,125 ----------- OIL AND GAS -- 3.8% 700 Amerada Hess Corp 35,394 1,700 Atlantic Richfield Co 120,700 1,190 BP Amoco PLC ADR 55,930 2,000 EOG Resources Inc 30,500 800 Exxon Mobil Corp 60,250 1,600 Phillips Petroleum Co 61,200 1,900 Texaco Inc 90,131 2,100 USX - Marathon Group 45,412 ----------- 499,517 ----------- PAPER AND ALLIED PRODUCTS -- 0.1% 400 Sonoco Products Co 7,375 ----------- PHARMACEUTICALS -- 7.0% 7,900 Abbott Laboratories 258,725 9,400 Amgen Inc* 640,963 200 Bristol Myers Squibb Co 11,363 600 Mark IV Industries Inc 12,000 ----------- 923,051 -----------
See accompanying notes to the financial statements. 4 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------- PRIMARY MATERIALS -- 0.4% 500 A. Schulman Inc 6,625 300 Vulcan Materials Co 12,000 900 Weatherford International Inc 40,500 ----------- 59,125 ----------- PRIMARY PROCESSING -- 0.6% 1,300 Nucor Corp 64,594 400 USX-US Steel Group Inc 8,750 300 Valspar Corp 9,844 ----------- 83,188 ----------- PRINTING AND PUBLISHING -- 0.7% 400 Central Newspapers Inc, Class A 11,425 200 Gannett Co Inc 13,038 200 Pulitzer Inc 7,763 1,200 TV Guide Inc, Class A* 56,550 ----------- 88,776 ----------- REAL ESTATE -- 0.6% 2,700 Mack-Cali Realty Corp, REIT 64,125 600 Parkway Properties Inc, REIT 17,775 ----------- 81,900 ----------- REFINING -- 0.1% 400 Tosco Corp 10,700 ----------- RETAIL TRADE -- 4.2% 2,100 Albertsons Inc 51,450 1,600 Autozone Inc* 39,300 700 Delhaize America Inc 13,125 500 Dillard's Inc 8,688 1,400 Federated Department Stores Inc* 51,363 200 Hannaford Brothers Co 14,250 1,500 Kmart Corp* 13,219 300 Lands End Inc* 9,956 4,000 McDonald's Corp 126,250 900 Office Depot Inc* 10,969 450 Outback Steakhouse Inc* 11,756
See accompanying notes to the financial statements. 5 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------- RETAIL TRADE -- CONTINUED 600 Ross Stores Inc 8,700 1,200 Safeway Inc* 46,275 4,600 Toys R Us Inc* 56,925 1,500 Wal Mart Stores Inc 73,031 1,200 Wendy's International Inc 18,900 ----------- 554,157 ----------- SERVICES -- 3.7% 400 Banta Corp 7,300 200 Catalina Marketing Corp* 17,025 206 Chris Craft Industries Inc* 13,557 6,200 Convergys Corp* 238,700 500 Fluor Corp 14,219 900 Harrahs Entertainment Inc* 17,213 600 Hertz Corp 21,488 400 Lee Enterprises Inc 8,325 4,400 Marriott International Inc, Class A 121,275 1,900 Mirage Resorts Inc* 30,163 329 Supervalu Inc 5,655 ----------- 494,920 ----------- TECHNOLOGY -- 8.7% 700 BMC Software Inc* 32,200 500 DST Systems Inc* 28,063 4,400 First Data Corp 198,000 2,000 Grainger (WW) Inc 85,625 5,500 Honeywell International Inc 264,688 1,800 Intel Corp 203,400 3,900 Microsoft Corp* 348,563 ----------- 1,160,539 ----------- TELECOMMUNICATIONS -- 7.0% 11,500 AT & T Corp 568,531 400 Bell Atlantic Corp 19,575 300 Bellsouth Corp 12,225 243 CBS Corp* 14,474 200 GTE Corp 11,800 327 Hearst-Argyle Television Inc* 6,806 2,400 MCI Worldcom Inc* 107,100
6 See accompanying notes to the financial statements. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------- TELECOMMUNICATIONS -- CONTINUED 400 Nextlink Communications, Class A* 44,075 3,926 SBC Communications Inc 149,188 ----------- 933,774 ----------- TOBACCO -- 0.7% 4,800 Philip Morris Cos Inc 96,300 ----------- TRANSPORTATION -- 1.4% 5,700 Burlington Northern Santa Fe Railroad Co 112,219 1,500 Continental Airlines Inc, Class B* 47,438 500 Galileo International Inc 8,500 400 UAL Corp* 19,500 ----------- 187,657 ----------- UTILITIES -- 2.8% 1,600 Citizens Utilities, Class B* 24,400 600 Coastal Corp 25,238 600 Constellation Energy Group Inc 17,850 700 DTE Energy Co 21,131 2,400 Entergy Corp 48,600 600 General Public Utilities Inc 14,925 692 Keyspan Corp 14,100 9,400 Niagara Mohawk Holdings Inc* 110,450 1,900 Northeast Utilities 35,744 1,500 PG & E Corp 30,938 300 Pinnacle West Capital Corp 8,288 600 Potomac Electric Power Co 12,188 400 SCANA Corp 9,525 300 Western Resources Inc 4,631 ----------- 378,008 ----------- TOTAL COMMON STOCKS (COST $10,638,447) 12,639,342 -----------
See accompanying notes to the financial statements. 7 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------ SHORT-TERM INVESTMENTS -- 4.9% REPURCHASE AGREEMENTS -- 4.9% $ 12,785 Morgan Stanley Inc. Repurchase Agreement, dated 2/29/00, due 3/01/00, with a maturity value of $12,786, and an effective yield of 4.93%, collateralized by a U.S. Treasury Obligation with a rate of 0.00%, maturity date of 6/01/00, and a market value, including accrued interest, of $19,708. 12,785 $ 639,519 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/01/00, with a maturity value of $639,607, and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19, and a market value, including accrued interest, of $652,310. 639,519 --------------- 652,304 --------------- TOTAL SHORT-TERM INVESTMENTS (COST $652,304) 652,304 --------------- TOTAL INVESTMENTS -- 100.1% (Cost $11,290,751) 13,291,646 Other Assets and Liabilities (net) -- (0.1%) (16,551) --------------- TOTAL NET ASSETS -- 100.0% $ 13,275,095 ===============
NOTES TO THE SCHEDULE OF INVESTMENTS: ADR - American Depositary Receipt REIT - Real Estate Investment Trust * Non-income producing security. 8 See accompanying notes to the financial statements. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $11,290,751) (Note 1) $13,291,646 Dividends and interest receivable 12,472 Receivable for expenses waived or borne by Manager (Note 2) 5,491 ----------- Total assets 13,309,609 ----------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 3,349 Shareholder service fee 1,522 Accrued expenses 29,643 ----------- Total liabilities 34,514 ----------- NET ASSETS $13,275,095 =========== NET ASSETS CONSIST OF: Paid-in capital $11,444,408 Accumulated undistributed net investment income 11,954 Accumulated net realized loss (182,162) Net unrealized appreciation 2,000,895 ----------- $13,275,095 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $13,275,095 =========== SHARES OUTSTANDING: Class III 1,050,117 =========== NET ASSET VALUE PER SHARE: Class III $ 12.64 ===========
See accompanying notes to the financial statements. 9 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $4,678) $ 153,611 Interest 23,323 ---------- Total income 176,934 ---------- EXPENSES: Management fee (Note 2) 36,665 Audit fees 35,019 Custodian and transfer agent fees 7,201 Registration fees 4,655 Legal fees 186 Trustees fees (Note 2) 128 Miscellaneous 1,189 Fees waived or borne by Manager (Note 2) (48,378) ---------- 36,665 Shareholder service fee (Note 2) Class III 16,666 ---------- Net expenses 53,331 ---------- Net investment income 123,603 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized loss on investments (183,244) ---------- Change in net unrealized appreciation (depreciation) on investments 2,070,332 ---------- Net realized and unrealized gain 1,887,088 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,010,691 ==========
10 See accompanying notes to the financial statements. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD FROM JULY 23, 1998 YEAR ENDED (COMMENCEMENT OF OPERATIONS) FEBRUARY 29, 2000 THROUGH FEBRUARY 28, 1999 ----------------- ---------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 123,603 $ 41,974 Net realized gain (loss) (183,244) 274,006 Change in net unrealized appreciation (depreciation) 2,070,332 (151,997) ----------- ---------- Net increase in net assets from operations 2,010,691 163,983 ----------- ---------- Distributions to shareholders from: Net investment income Class III (122,085) (30,456) ----------- ---------- Total distributions from net investment income (122,085) (30,456) ----------- ---------- Net share transactions: (Note 5) Class III 3,270,972 7,981,990 ----------- ---------- Increase in net assets resulting from net share transactions 3,270,972 7,981,990 ----------- ---------- Total increase in net assets 5,159,578 8,115,517 NET ASSETS: Beginning of period 8,115,517 -- ----------- ---------- End of period (including accumulated undistributed net investment income of $11,954 and $11,518, respectively) $13,275,095 $8,115,517 =========== ==========
See accompanying notes to the financial statements. 11 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JULY 23, 1998 (COMMENCEMENT YEAR ENDED OF OPERATIONS) THROUGH FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.67 $ 10.00 ------- ------- Income from investment operations: Net investment income 0.13 0.09 Net realized and unrealized gain 1.97 0.65 ------- ------- Total from investment operations 2.10 0.74 ------- ------- Less distributions to shareholders: From net investment income (0.13) (0.07) ------- ------- Total distributions (0.13) (0.07) ------- ------- NET ASSET VALUE, END OF PERIOD $ 12.64 $ 10.67 ======= ======= TOTAL RETURN(a) 19.83% 7.48%+ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $13,275 $ 8,116 Net expenses to average daily net assets 0.48% 0.48%* Net investment income to average daily net assets 1.11% 1.30%* Portfolio turnover rate 19% 33% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.05 $ 0.10
(a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. * Annualized. + Not annualized. 12 See accompanying notes to the financial statements. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Tax-Managed U.S. Equities Fund (the "Fund"), which commenced operations on July 23, 1998, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high after-tax total return primarily through investment in U.S. equity securities. The Fund's benchmark is the GMO S&P 500 (After Tax). The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an 13 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 29, 2000, the Fund held no open futures contracts. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund enters into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The Fund also enters into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the 14 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 29, 2000, there were no open swap agreements. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to the classification of distributions from REIT securities. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $(1,082) $1,082 $ --
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for 15 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .14% of the amount invested. All purchase premiums are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $4,500 in purchase premiums. There is no premium for redemptions, reinvested distributions or in-kind transactions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .525% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeded .33% of average daily net assets. 16 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $128. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $4,949,504 and $2,014,330, respectively. At February 29, 2000, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $11,347,996 $3,673,564 $(1,729,914) $1,943,650
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 98.4% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders could have a material effect. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from July 23, 1998 (commencement of Year Ended operations) February 29, 2000 to February 28, 1999 -------------------- ------------------------- Shares Amount Shares Amount Class III: -------- ---------- ----------- ------------ Shares sold 284,602 $3,214,362 928,320 $ 9,723,200 Shares issued to shareholders in reinvestment of distributions 4,942 56,610 -- -- Shares repurchased -- -- (167,747) (1,741,210) -------- ---------- ---------- ----------- Net increase 289,544 $3,270,972 760,573 $ 7,981,990 ======== ========== ========== ===========
17 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- The Fund has elected to defer to March 1, 2000 post October capital losses of $192. At February 29, 2000 the Fund had a capital loss carryforward available to offset future capital gains, if any, of the following amount:
Year of Expiration Amount ------------------ -------- 2008 $124,725
18 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are primarily responsible for the management of the Fund's portfolio. Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The GMO Tax-Managed U.S. Equities Fund returned 19.8% for the fiscal year ended February 29, 2000, as compared to 11.7% for the S&P 500 before taxes. On an after-tax basis, the Fund returned 19.3% to the benchmark's 11.2% for the same period. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in U.S. equity securities throughout the period. The Fund's striking outperformance of the benchmark for the period is directly attributed to overweights in four stocks -- Amgen, Cisco Systems, Oracle and 3 Com -- which posted remarkable results for the period, especially in the last quarter of the fiscal year. Excluding these selections, both stock selection and sector selection detracted from relative performance for the period. The Fund's value bias proved detrimental as growth stocks outperformed value stocks by 35%, as represented by the Russell 1000 Growth and Russell 1000 Value Indices. Within sector selection, the Fund's 3.6% underweight in technology stocks detracted 67 basis points from relative performance, as the sector returned over 80% for the fiscal year. Overweights in financial services and health care stocks, which underperformed by 23.8% and 25.2%, respectively, combined to detract 158 basis points from relative performance. The Fund's 3.0% underweight in consumer discrecionary stocks, which underperformed by 10.7%, contributed moderately to performance. In combination, sector selection detracted 520 basis points from relative performance. As discussed earlier, stock selection was positive within health care and technology stocks, contributing 18.8% to relative performance. Selection within these two sectors more than offset weaker selection in other sectors, including utilities, automotive and transportation and consumer discretionary stocks. In combination, stock selection contributed 13.4% to relative performance. Historically, our price-to-fair value stock selection model has a strong record of selecting relatively undervalued stocks outside traditional value filters. It was this strategy which identified the four stocks that dominated performance for the fiscal year. While the price-to-book stock selection strategy was unsuccessful in adding value during the fiscal year, we expect both strategies to perform well over the long term. OUTLOOK The unanticipated takeoff of the technology stocks within the Fund has moved it away from its long-term target weights with respect to stocks which are attractive on price-to-book and price-to-fair value measures, and we have already begun moving the Fund back to these targets. The timing of this move will be carefully controlled as we pay close attention to the trade-off between our expectations for these stocks and the tax liability incurred as we move out of some of our most highly appreciated positions. We currently believe that low price-to-book stocks are as attractive as we've experienced in over twenty years, and we will be increasing our exposure to these stocks over the coming months. In addition, we are incorporating a price momentum strategy into the Fund, which we have successfully used in other GMO quantitative equity funds. Turnover of this model is carefully controlled to minimize tax impact. We expect the addition of this strategy will contribute positively to the Fund's long-term expected value added. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO TAX-MANAGED U.S. EQUITIES FUND CLASS III SHARES AND THE S&P 500 INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns* Inception 7/23/98 1yr 5yr 10yr (ITD) 19.67 N/A 16.97
[GRAPH]
Date GMO Tax Managed U.S. Equities Fund S&P 500 7/23/98 9986 10000 9/30/98 9497 8952 12/31/98 10944 10859 3/31/99 10954 11400 6/30/99 11974 12203 9/30/99 11054 11441 12/31/99 12801 13143 2/29/00 12862 12247
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 14 bp on the purchase. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. * Returns are before taxes GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO U.S. Sector Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ MUTUAL FUNDS -- 100.4% 22,014 GMO REIT Fund 181,839 7,749 GMO Small Cap Growth Fund 130,725 13,917 GMO Small Cap Value Fund 172,716 67,574 GMO U.S. Core Fund 1,123,755 ------------ TOTAL MUTUAL FUNDS (COST $1,787,206) 1,609,035 ------------ SHORT-TERM INVESTMENTS -- 0.6% REPURCHASE AGREEMENT -- 0.6% $ 9,330 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/01/00, with a maturity value of $9,331, and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19, and a market value, including accrued interest, of $9,517. 9,330 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $9,330) 9,330 ------------ TOTAL INVESTMENTS -- 101.0% (Cost $1,796,536) 1,618,365 Other Assets and Liabilities (net) -- (1.0%) (15,873) ------------ TOTAL NET ASSETS -- 100.0% $ 1,602,492 ============
See accompanying notes to the financial statements. 1 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $1,796,536) (Note 1) $1,618,365 Receivable for expenses waived or borne by Manager (Note 2) 3,318 ---------- Total assets 1,621,683 ---------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 429 Accrued expenses 18,762 ---------- Total liabilities 19,191 ---------- NET ASSETS $1,602,492 ========== NET ASSETS CONSIST OF: Paid-in capital $1,876,105 Accumulated net realized loss (95,442) Net unrealized depreciation (178,171) ---------- $1,602,492 ========== NET ASSETS ATTRIBUTABLE TO: Class III shares $1,602,492 ========== SHARES OUTSTANDING: Class III 330,928 ========== NET ASSET VALUE PER SHARE: Class III $ 4.84 ==========
2 See accompanying notes to the financial statements. GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 258,780 Interest 764 ----------- Total income 259,544 ----------- EXPENSES: Management fee (Note 2) 46,391 Audit fees 19,574 Custodian and transfer agent fees 2,249 Registration fees 2,016 Trustees fees (Note 2) 186 Legal fees 181 Miscellaneous 1,921 Fees waived or borne by Manager (Note 2) (72,518) ----------- Net expenses -- ----------- Net investment income 259,544 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (1,407,288) Realized gain distributions from investment company shares 2,479,580 ----------- Net realized gain 1,072,292 ----------- Change in net unrealized appreciation (depreciation) on investments 1,162,450 ----------- Net realized and unrealized gain 2,234,742 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,494,286 ===========
See accompanying notes to the financial statements. 3 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 259,544 $ 366,640 Net realized gain 1,072,292 5,068,304 Change in net unrealized appreciation (depreciation) 1,162,450 (2,256,138) ------------ ------------ Net increase in net assets resulting from operations 2,494,286 3,178,806 ------------ ------------ Distributions to shareholders from: Net investment income Class III (259,544) (366,924) ------------ ------------ Total distributions from net investment income (259,544) (366,924) ------------ ------------ In excess of net investment income Class III (429,148) (347,888) ------------ ------------ Total distributions in excess of net investment income (429,148) (347,888) ------------ ------------ Net realized gains Class III (601,330) (8,557,355) ------------ ------------ Total distributions from net realized gains (601,330) (8,557,355) ------------ ------------ In excess of net realized gains Class III -- (619,626) ------------ ------------ Total distributions in excess of net realized gains -- (619,626) ------------ ------------ (1,290,022) (9,891,793) ------------ ------------ Net share transactions: (Note 5) Class III (16,431,774) (47,279,849) ------------ ------------ Decrease in net assets resulting from net share transactions (16,431,774) (47,279,849) ------------ ------------ Total decrease in net assets (15,227,510) (53,992,836) NET ASSETS: Beginning of period 16,830,002 70,822,838 ------------ ------------ End of period (including distributions in excess of net investment income of $0 and $0, respectively) $ 1,602,492 $ 16,830,002 ============ ============
4 See accompanying notes to the financial statements. GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ------- ------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 4.63 $ 8.53 $ 13.03 $ 13.63 $ 11.06 ----------- ------- ------- -------- -------- Income from investment operations: Net investment income(a) 0.09+ 0.10+ 0.29+ 0.26 0.29 Net realized and unrealized gain 0.54 0.27 2.61 2.20 3.90 ----------- ------- ------- -------- -------- Total from investment operations 0.63 0.37 2.90 2.46 4.19 ----------- ------- ------- -------- -------- Less distributions to shareholders: From net investment income (0.09) (0.10) (0.40) (0.22) (0.29) In excess of net investment income (0.14) (0.15) (0.01) -- -- From net realized gains (0.19) (3.75) (6.99) (2.84) (1.33) In excess of net realized gains -- (0.27) -- -- -- ----------- ------- ------- -------- -------- Total distributions (0.42) (4.27) (7.40) (3.06) (1.62) ----------- ------- ------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 4.84 $ 4.63 $ 8.53 $ 13.03 $ 13.63 =========== ======= ======= ======== ======== TOTAL RETURN(b) 13.35% 3.13% 29.61% 20.88% 38.90% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 1,602 $16,830 $70,823 $226,711 $211,319 Net expenses to average daily net assets(c) 0.00% 0.00% 0.27% 0.48% 0.48% Net investment income to average daily net assets(a) 1.85% 1.51% 2.53% 1.99% 2.27% Portfolio turnover rate 22% 16% 150% 104% 84% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.03 $ 0.04 $ 0.04 $ 0.02 $ 0.01
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests. (b) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (c) On August 20, 1997, the Fund began to invest a substantial portion of its assets in other funds of GMO Trust and revised its voluntary expense waiver. Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. + Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 5 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO U.S. Sector Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks total return greater than that of the S&P 500 through investment in common stocks, either directly or through investment in other Funds of the Trust ("underlying Funds"). The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying Funds are valued at their net asset value as reported on each business day. 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. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. 6 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to differing treatments for the classification of distributions received from underlying funds and redemptions in-kind. Gains resulting from such in-kind transactions amounted to $71,086. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $429,148 $(113,806) $(315,342)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for 7 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying funds are recorded on the ex-dividend date. Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying Funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. (See Note 2). PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .27% of the amount invested. In the case of cash redemptions, the fee is .18% of the amount redeemed. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $12,587 in redemption fees and no purchase premiums. There is no premium for reinvested distributions or in-kind transactions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of .15% for Class III shares. The Fund will invest in Class III shares of each underlying Fund being offered. Like the management fee (as described below), the shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in shares of underlying Funds. 8 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees and the following expenses: brokerage commissions, and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses and transfer taxes ("fund expenses")) plus the amount of fees and expenses, excluding shareholder service fee and fund expenses (as defined above) incurred indirectly by the Fund through investment in underlying Funds exceed the management fee. Because GMO will not reimburse expenses incurred indirectly to the extent they exceed .33%, and because the amount of fees and expenses incurred indirectly by the Fund will vary, the operating expenses (excluding shareholder service fees and fund expenses) incurred indirectly by the Fund through investment in underlying Funds may exceed .33% of the Fund's average daily net assets. For the year ended February 29, 2000, operating expenses (excluding shareholder service fees and fund expenses) incurred indirectly by the Fund were .35% of the Fund's average daily net assets. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .49% of average daily net assets. GMO had agreed to waive a portion of its fee (but not below zero) and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses ("fund expenses")) plus the amount of fees and expenses, excluding shareholder service fee and fund expenses (as defined above) incurred indirectly by the Fund through investment in underlying Funds exceeded .33% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $186. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $2,892,814 and $17,876,557, respectively. At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $1,907,835 $49,763 $(339,233) $(289,470)
9 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDER At February 29, 2000, 100% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder could have a material effect. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ------------------------- ------------------------- Shares Amount Shares Amount Class III: ----------- ------------ ----------- ------------ Shares sold -- $ -- -- $ -- Shares issued to shareholders in reinvestment of distributions 184,352 932,337 1,801,919 9,891,793 Shares repurchased (3,489,575) (17,364,111) (6,465,314) (57,171,642) ----------- ------------ ----------- ------------ Net decrease (3,305,223) $(16,431,774) (4,663,395) $(47,279,849) =========== ============ =========== ============
10 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 46.6% of distributions as net capital gain dividends. 11 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are primarily responsible for the day-to-day management of the Fund's portfolio. Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO U.S. Sector Fund returned 13.4% for the fiscal year ended February 29, 2000, as compared to 11.7% for the S&P 500. The GMO U.S. Sector Fund currently invests in the GMO U.S. Core Fund, GMO REIT Fund, GMO Small Cap Growth Fund and GMO Small Cap Value Fund. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in funds invested in common stocks throughout the period. The Fund's outperformance relative to the S&P 500 for the fiscal year was due primarily to the allocation in favor of small-cap growth stocks. These stocks outperformed all other segments of the market. For the fiscal year, the Russell 2000 Growth Index outperformed the Russell 2000 Value Index by 72.3%. The benchmark for our Small Cap Growth Fund, the Russell 2500 Growth Index, outperformed the Russell 2500 Value Index by an even greater margin, 98.1%. The positive impact of this decision was somewhat offset by the overweight in REITs and small cap value stocks. REITs, as represented by the Morgan Stanley REIT Index, declined -1.3% for the fiscal year despite their attractive dividend yields, underperforming the S&P 500 by 13.0%. Implementation within the Fund detracted from performance for the fiscal year. While the U.S. Core and Small Cap Value Funds outperformed their respective benchmarks, the Small Cap Growth and REIT Funds underperformed their benchmarks. The Funds' bias toward value stocks detracted from performance in a narrow market dominated by growth stocks. OUTLOOK Small-cap value stocks and REITs are extremely attractively valued. We expect the Fund to benefit from an eventual recovery of these sectors of the market. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO U.S. SECTOR FUND CLASS III SHARES AND THE S&P 500 INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 12/31/92 1yr 5yr 10yr (ITD) 12.84 20.4 17.83
[GRAPH]
Date GMO U.S. Sector Fund-III S&P 500 12/31/92 9973 10000 3/31/93 10621 10437 6/30/93 10871 10488 9/30/93 11439 10758 12/31/93 11657 11008 3/31/94 11424 10590 6/30/94 11405 10634 9/30/94 11911 11154 12/31/94 12038 11153 3/31/95 13134 12239 6/30/95 14580 13407 9/30/95 16160 14472 12/31/95 17236 15344 3/31/96 17835 16167 6/30/96 18443 16893 9/30/96 18955 17415 12/31/96 20379 18867 3/31/97 20840 19373 6/30/97 23384 22755 9/30/97 26126 24459 12/31/97 26215 25161 3/31/98 28951 28670 6/30/98 28821 29617 9/30/98 25212 26671 12/31/98 29267 32351 3/31/99 29329 33963 6/30/99 32114 36357 9/30/99 29762 34086 12/31/99 33456 39157 2/29/00 32416 36486
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 27 bp on the purchase and 18 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO GROWTH FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO GROWTH FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Growth Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- COMMON STOCKS -- 98.0% AEROSPACE -- 0.1% 5,500 Cordant Technologies Inc 178,062 1,500 Northrop Grumman Corp 68,156 ------------- 246,218 ------------- AUTOMOTIVE -- 0.5% 14,600 Autonation Inc* 110,412 1,100 General Motors Corp 83,669 3,500 General Motors Corp, Class H* 421,750 5,850 Genuine Parts Co 131,991 2,900 Goodyear Tire & Rubber Co 65,794 4,900 Lear Corp* 103,512 3,300 Meritor Automotive Inc 46,200 ------------- 963,328 ------------- BANKING AND FINANCIAL SERVICES -- 2.2% 7,200 American Express Co 966,150 5,286 Bear Stearns Cos Inc 207,476 8,500 Comdisco Inc 326,719 8,000 Countrywide Credit Industries Inc 199,500 2,000 Donaldson Lufkin & Jenrette 86,875 2,700 Edwards (AG) Inc 85,556 6,300 Fannie Mae 333,900 8,900 Franklin Resources Inc 241,969 10,200 Freddie Mac 425,850 4,100 Hibernia Corporation, Class A 37,156 23,600 Household International Inc 753,725 1,800 Lehman Brothers Holding Inc 130,500 450 Liberty Financial Cos 8,691 5,500 MGIC Investment Corp 205,562 1,800 Morgan Stanley Dean Witter & Co 126,787 900 Paine Webber Group Inc 34,425 4,500 PMI Group Inc 163,406 3,000 Rowe (T) Price & Associates Inc 98,812 2,100 UnionBanCal Corp 67,462 ------------- 4,500,521 -------------
See accompanying notes to the financial statements. 1 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CHEMICALS -- 1.1% 19,800 Air Products and Chemicals 509,850 3,100 Eastman Chemical Co 111,406 7,300 Engelhard Corp 99,462 2,300 Hercules Inc 37,950 2,300 IMC Global Inc 31,050 3,300 PPG Industries Inc 162,937 13,500 Praxair Inc 455,625 8,423 Rohm & Haas Co 340,079 7,300 Sherwin Williams Co 139,612 3,700 Terra Industries Inc 8,556 6,200 Union Carbide Corp 332,862 1,200 Wellman Inc 22,350 ------------- 2,251,739 ------------- COMMUNICATIONS -- 0.0% 1,031 NTL Inc* 94,359 ------------- COMPUTER AND OFFICE EQUIPMENT -- 20.8% 5,700 Advanced Micro Devices Inc* 223,012 4,600 Apple Computer Inc* 527,275 106,100 Cisco Systems Inc* 14,025,094 31,600 Computer Associates International Inc 2,032,275 3,750 Comverse Technology Inc* 738,281 1,800 Concord EFS Inc* 35,212 25,700 Dell Computer Corp* 1,048,881 16,600 Electronic Data Systems Corp 1,074,850 34,300 EMC Corp* 4,081,700 500 Emulex Corp* 80,000 10,300 Gateway Inc* 708,125 47,500 Hewlett Packard Co 6,388,750 5,500 Lexmark International Group Inc* 655,875 16,200 Micron Technology Inc* 1,588,612 119,100 Oracle Corp* 8,843,175 4,400 Reynolds & Reynolds Inc, Class A 121,550 200 Safeguard Scientifics Inc* 34,987 1,000 Sandisk Corp* 89,000 5,700 Silicon Graphics Inc* 55,931 9,600 Xerox Corp 208,200
2 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- COMPUTER AND OFFICE EQUIPMENT -- CONTINUED 800 Zebra Technologies Corp* 53,250 ------------- 42,614,035 ------------- CONSTRUCTION -- 1.4% 50,450 Home Depot Inc 2,916,641 ------------- CONSUMER GOODS -- 2.0% 1,800 Department 56 Inc* 25,425 14,600 Eastman Kodak Co 836,762 3,500 Furniture Brands International Inc* 56,219 3,250 Hasbro Inc 51,187 2,700 Hon Industries Inc 49,781 5,400 Johnson Controls 288,225 10,900 Jones Apparel Group Inc* 246,612 4,500 Lancaster Colony Corp 133,875 3,900 Liz Claiborne Inc 146,006 36,400 Mattel Co 350,350 800 Maytag Corp 21,150 37,191 Newell Rubbermaid Inc 860,042 13,100 Nike Inc, Class B 372,531 200 Patterson Dental Company* 7,206 3,000 Polo Ralph Lauren Corp* 50,250 2,200 Procurenet* 0 1,300 Reebok International Ltd* 10,400 2,700 Steelcase Inc 33,075 1,600 Tech Data Corp* 34,700 1,600 Tupperware Corp 27,500 2,600 US Industries Inc 29,737 7,100 VF Corp 175,281 500 Wallace Computer Services 5,219 4,000 Warnaco Group Inc, Class A 43,500 5,000 Whirlpool Corp 271,562 ------------- 4,126,595 ------------- ELECTRONIC EQUIPMENT -- 13.7% 15,600 3 Com Corp* 1,528,800 9,300 Adaptec Inc* 381,300 8,800 ADC Telecommunications Inc* 394,900 3,300 Altera Corp* 263,175
See accompanying notes to the financial statements. 3 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- ELECTRONIC EQUIPMENT -- CONTINUED 9,000 American Power Conversion Corp* 305,437 300 Amphenol Corp, Class A* 23,981 5,400 Analog Devices Inc* 847,800 1,200 Antec Corp* 63,525 27,700 Atmel Corp* 1,371,150 1,400 C-Cube Microsystems Inc* 130,550 3,900 Cooper Industries Inc 117,975 2,600 Dallas Semiconductor Corp 104,975 7,200 EchoStar Communications Corp* 820,800 10,500 Emerson Electric Co 478,406 3,500 Hubbell Inc, Class B 85,094 4,000 Integrated Device Technology Inc* 147,500 8,300 Jabil Circuit Inc* 576,331 1,000 Kemet Corp* 61,437 1,000 Lattice Semiconductor Corp* 70,250 4,100 Linear Technology Corp 430,244 3,000 Litton Industries * 89,812 15,000 LSI Logic Corp* 960,937 6,900 Maxim Integrated Products Inc* 461,006 5,550 Microchip Technology Inc* 346,528 5,850 Molex Inc 326,869 16,042 Motorola Inc 2,735,161 14,700 National Semiconductor Corp* 1,104,337 2,200 Nortel Networks Corp 245,300 8,800 PMC-Sierra Inc* 1,698,950 26,600 Qualcomm Inc* 3,788,837 10,900 Raytheon Co, Class B 201,650 200 Read Rite Corp* 756 1,000 Sanmina Corp* 117,062 1,400 SCI Systems Inc* 56,350 14,300 Tellabs Inc* 686,400 29,900 Texas Instruments Inc 4,978,350 800 Thomas & Betts Corp 17,950 9,200 Vitesse Semiconductor Corp* 955,075 13,500 Xilinx Inc* 1,076,625 ------------- 28,051,585 ------------- FOOD AND BEVERAGE -- 2.1% 1,900 Anheuser Busch Cos Inc 121,837 33,120 Archer Daniels Midland Co 333,270 25,700 Coca Cola Co 1,244,844
4 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FOOD AND BEVERAGE -- CONTINUED 3,600 Coca Cola Enterprises Inc 84,150 15,000 ConAgra Inc 245,625 1,300 Dole Food Co 19,987 5,900 IBP Inc 73,750 3,800 Interstate Bakeries Corp 43,462 20,900 Nabisco Group Holdings 180,262 2,200 Nabisco Holdings Corp, Class A 64,350 4,100 Pepsico Inc 132,225 12,600 Ralston-Purina Group 356,737 15,966 RJ Reynolds Tobacco Holdings 287,388 1,700 Seagrams Co Ltd 99,875 15,900 Sysco Corp 521,719 3,700 Tyson Food Inc, Class A 38,156 2,600 Universal Corp 42,575 5,200 Wrigley (William Jr) Co 351,650 ------------- 4,241,862 ------------- HEALTH CARE -- 3.6% 7,300 Becton Dickinson & Co 226,756 10,800 BioMet Inc 356,400 14,400 Boston Scientific Corp* 262,800 300 Cardinal Health Inc 12,375 3,800 Chiron Corp* 190,000 43,300 Columbia HCA Healthcare Corp 836,231 6,100 Dentsply International Inc 156,312 22,100 Health Management Associates Inc* 237,575 64,300 Healthsouth Corp* 313,462 4,700 Hillenbrand Industries Inc 142,762 8,600 Integrated Health Services Inc* 1,118 15,600 Johnson & Johnson 1,119,300 1,200 Lincare Holdings Inc* 28,125 4,400 Mallinckrodt Inc 108,350 11,500 Manor Care Inc* 99,906 6,500 Mariner Post-Acute Network Inc* 1,170 2,200 Medimmune Inc* 436,700 5,300 Novacare Corp* 943 100 Pharmacia & Upjohn Inc 4,762 1,200 Quest Diagnostics Inc* 41,175 6,100 Quorum Health Group Inc* 54,328 3,100 St Jude Medical Inc* 80,987 5,500 Stryker Corp 321,750
See accompanying notes to the financial statements. 5 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 28,800 Tenet Healthcare Corp* 504,000 1,300 Trigon Healthcare Inc* 41,519 22,300 United Healthcare Corp 1,140,087 1,300 Universal Health Services, Class B* 50,537 4,000 Visx Inc* 67,750 7,800 Wellpoint Health Network* 526,500 ------------- 7,363,680 ------------- INSURANCE -- 1.6% 10,300 Aetna Life and Casualty Co 423,588 2,400 Allstate Corp 46,800 900 AMBAC Inc 39,544 1,100 American National Insurance Co 64,350 9,700 Cigna Corp 715,981 2,300 CNA Financial Corp* 62,100 600 Commerce Group Inc 17,925 4,100 Conseco Inc 59,963 1,400 Erie Indemnity Company - Class A 43,400 6,900 Foundation Health Systems Inc, Class A* 57,356 4,800 Hartford Financial Services Group Inc 150,000 12,400 Humana Inc* 84,475 5,700 Loews Corp 253,650 3,400 MBIA Inc 130,475 1,500 Nationwide Financial Service, Class A 34,594 2,000 Old Republic International Corp 23,375 4,000 Oxford Health Plans Inc* 61,750 6,100 Pacificare Health Systems Inc* 277,169 3,100 Safeco Corp 65,100 14,900 Saint Paul Cos Inc 333,388 2,400 Torchmark Corp 47,550 2,400 Transatlantic Holding Inc 169,050 2,600 Travelers Property Casualty Corp, Class A 82,225 1,800 Unumprovident Corp 24,075 ------------- 3,267,883 ------------- MACHINERY -- 2.3% 2,100 American Standard Co* 73,238 20,700 Applied Materials Inc* 3,786,806 900 Cooper Cameron Corp* 49,725 300 Deere and Co 10,725 2,500 Federal Mogul Corp 34,063
6 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MACHINERY -- CONTINUED 2,100 Lam Research Corp* 327,863 4,400 Novellus System Inc* 260,975 1,700 Parker-Hannifin Corp 61,625 300 Tecumseh Products Co, Class B 12,094 1,500 York International Corp 27,188 ------------- 4,644,302 ------------- MANUFACTURING -- 1.4% 1,100 American Greetings Corp 18,975 1,900 Armstrong World Industries Inc 36,100 900 Benjamin Moore & Co 25,538 1,700 Corning Inc 319,600 1,100 Crane Co 21,863 5,200 Illinois Tool Works Inc 268,775 9,200 International Game Technology* 163,875 10,000 Leggett & Platt Inc 168,125 2,200 Minnesota Mining and Manufacturing Co 193,875 8,800 Owens Illinois Inc* 121,550 1,900 Rockwell International Corp 85,975 17,772 Tyco International Ltd 674,225 15,900 United Technologies Corp 809,906 ------------- 2,908,382 ------------- METALS AND MINING -- 0.1% 2,050 Allegheny Technologies Inc 34,722 9,800 Freeport-McMoran Copper & Gold Inc* 134,750 ------------- 169,472 ------------- OIL AND GAS -- 1.8% 5,700 Apache Corp 208,050 8,200 Atlantic Richfield Co 582,200 2,300 Burlington Resources Inc 63,538 7,300 Columbia Energy Group 430,700 10,700 Diamond Offshore Drilling Inc 339,725 1,300 EOG Resources Inc 19,825 5,200 Kerr-McGee Corp 232,700 400 Kinder Morgan Inc 11,150 14,800 Occidental Petroleum Corp 237,725 8,700 Phillips Petroleum Co 332,775 2,700 Tidewater Inc 76,444
See accompanying notes to the financial statements. 7 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- OIL AND GAS -- CONTINUED 14,600 Transocean Sedco Forex Inc 575,788 6,400 Union Pacific Resources Group 57,200 9,500 Unocal Corp 254,125 10,800 USX - Marathon Group 233,550 1,800 Vastar Resources Inc 95,513 ------------- 3,751,008 ------------- PAPER AND ALLIED PRODUCTS -- 0.5% 10,900 Kimberly-Clark Corp 563,394 2,700 Mead Corp 80,831 600 Pentair Inc 20,625 9,650 Sonoco Products Co 177,922 3,300 Westvaco Corp 90,956 ------------- 933,728 ------------- PHARMACEUTICALS -- 5.7% 57,608 Abbott Laboratories 1,886,662 2,000 Alza Corp* 73,375 57,700 Amgen Inc* 3,934,419 7,050 Bergen Brunswig Corp, Class A 34,809 1,300 Biogen Inc* 140,319 1,300 Genzyme Corp - General Division* 74,669 1,900 IDEC Pharmaceuticals Corp* 267,663 5,500 Immunex Corp* 1,085,906 21,100 IMS Health Inc 424,638 2,730 Mark IV Industries Inc 54,600 9,400 Merck & Co Inc 578,688 17,600 Mylan Laboratories Inc 404,800 5,100 Nu Skin Enterprises Inc* 45,581 74,736 Pfizer Inc 2,400,894 8,300 Schering Plough Corp 289,463 ------------- 11,696,486 ------------- PRIMARY MATERIALS -- 0.2% 7,300 Crown Cork & Seal Inc 102,200 4,200 Sealed Air Corp* 208,688 2,800 Weatherford International Inc 126,000 ------------- 436,888 -------------
See accompanying notes to the financial statements. 8 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- PRIMARY PROCESSING -- 0.3% 7,200 Howmet International Inc* 131,850 300 Mueller Industries Inc* 8,588 7,500 Nucor Corp 372,656 2,100 Worthington Industries Inc 27,825 ------------- 540,919 ------------- PRINTING AND PUBLISHING -- 0.4% 2,800 Central Newspapers Inc, Class A 79,975 2,400 Gannett Co Inc 156,450 3,000 Houghton Mifflin Co 119,438 2,800 John Wiley and Sons Inc, Class A 39,900 7,700 TV Guide Inc, Class A* 362,863 ------------- 758,626 ------------- REFINING -- 0.2% 3,100 Ashland Inc 96,488 10,100 Tosco Corp 270,175 600 Ultramar Diamond Shamrock Corp 13,013 ------------- 379,676 ------------- RETAIL TRADE -- 3.2% 17,342 Albertsons Inc 424,879 5,400 Autozone Inc* 132,638 500 Blair Corp 8,688 1,000 Circuit City Stores Inc 40,375 4,533 Delhaize America Inc 84,994 7,700 Dillard's Inc 133,788 2,400 Federated Department Stores Inc* 88,050 1,700 Fruit of the Loom Inc, Class A* 2,550 1,200 Hannaford Brothers Co 85,500 7,100 Kmart Corp* 62,569 15,000 Kroger Co* 223,125 2,000 May Department Stores Co 52,375 4,800 Neiman Marcus Group Inc, Class A* 102,300 5,250 Office Depot Inc* 63,984 1,100 Payless ShoeSource Inc* 43,450 400 Pier 1 Imports Inc 3,500 4,300 Rite Aid Corp 29,563 38,026 Safeway Inc* 1,466,378 3,500 Sears Roebuck & Co 96,469
See accompanying notes to the financial statements. 9 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- RETAIL TRADE -- CONTINUED 1,300 TJX Cos Inc 20,719 22,300 Toys R Us Inc* 275,963 60,400 Wal Mart Stores Inc 2,940,725 12,700 Wendy's International Inc 200,025 ------------- 6,582,607 ------------- SERVICES -- 1.8% 500 Catalina Marketing Corp* 42,563 1,100 Chris Craft Industries Inc* 72,394 3,300 Fluor Corp 93,844 8,500 Harrahs Entertainment Inc* 162,563 3,200 Hertz Corp 114,600 16,079 Hilton Hotels Corp 112,553 2,200 Icos Corp* 115,225 1,300 Mandalay Resort Group* 18,281 2,900 Manpower Inc 94,794 6,400 Marriott International Inc, Class A 176,400 9,400 Mirage Resorts Inc* 149,225 300 Omnicom Group 28,256 27,700 Park Place Entertainment Corp* 313,356 2,400 Republic Services Inc, Class A* 26,100 14,900 Service Corp International 54,944 6,900 Servicemaster Company 75,900 1,400 Speedway Motorsports Inc* 42,875 10,800 Supervalu Inc 185,625 49,100 The Walt Disney Co. 1,644,850 2,200 UnitedGlobal.Com Inc, Class A* 229,900 ------------- 3,754,248 ------------- TECHNOLOGY -- 25.0% 12,900 Adobe Systems Inc 1,315,800 37,100 America Online Inc* 2,188,900 1,300 American Management Systems Inc* 41,356 4,500 Automatic Data Processing Inc 196,031 500 Avnet Inc 33,438 4,400 Beckman Coulter Inc 211,750 16,400 BMC Software Inc* 754,400 7,500 Cabletron Systems Inc* 367,500 5,000 Cadence Design Systems Inc* 99,688 6,200 Ceridian Corp* 122,838 6,800 Citrix Systems Inc* 716,975
10 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 6,000 CMG Information Services Inc* 777,375 13,761 Compaq Computer Corp 342,305 4,400 Computer Sciences Corp* 346,775 1,100 CSG Systems International Inc* 56,513 300 DST Systems Inc* 16,838 1,700 Electronics For Imaging Inc* 100,938 16,300 First Data Corp 733,500 400 G TECH Holdings Corp* 8,000 28,100 Honeywell International Inc 1,352,313 1,200 Hyperion Solutions Corp* 59,250 105,204 Intel Corp 11,888,052 13,384 JDS Uniphase Corp* 3,528,357 4,200 KLA Instruments Corp* 327,338 400 Macromedia Inc* 34,575 1,600 Mercury Interactive Corp* 154,200 122,900 Microsoft Corp* 10,984,188 1,400 National Data Corp 43,400 6,100 Network Appliance Inc* 1,151,375 15,500 Novell Inc* 512,469 7,700 Parametric Technology Corp* 233,406 13,800 PE Corp - PE Biosystems Group 1,455,900 3,000 Psinet Inc* 139,125 300 Remedy Corp* 17,006 1,000 RSA Security Inc* 66,938 17,800 Seagate Technology Corp* 887,775 400 Shared Medical Systems Corp 15,575 16,100 Solectron Corp* 1,054,550 89,000 Sun Microsystems Inc* 8,477,250 1,900 Symantec Co* 135,731 4,700 Synopsys Inc* 187,706 ------------- 51,137,399 ------------- TELECOMMUNICATIONS -- 4.0% 1,000 Adtran Inc* 73,563 3,000 Alltel Corp 174,000 1,200 Aspect Communications Corp* 77,325 18,700 AT & T Corp 924,481 9,700 Bell Atlantic Corp 474,694 1,800 Centennial Cellular Corp, Class A* 43,706 3,825 Centurytel Inc 128,616 1,895 Comsat Corp 31,860
See accompanying notes to the financial statements. 11 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- TELECOMMUNICATIONS -- CONTINUED 27,200 GTE Corp 1,604,800 7,800 Lucent Technologies Inc 464,100 20,935 MCI Worldcom Inc* 934,224 700 MRV Communications Inc* 109,769 6,200 Nextel Communications Inc, Class A* 847,850 36,900 SBC Communications Inc 1,402,200 2,000 Telephone and Data Systems Inc 211,000 4,000 United States Cellular Corp* 267,750 6,300 Viacom Inc, Class B* 351,225 ------------- 8,121,163 ------------- TEXTILES -- 0.0% 6,300 Shaw Industries Inc 79,931 800 Westpoint Stevens Inc 13,300 ------------- 93,231 ------------- TOBACCO -- 1.2% 119,384 Philip Morris Cos Inc 2,395,142 ------------- TRANSPORTATION -- 0.4% 10,200 Brunswick Corp 180,413 22,300 Burlington Northern Santa Fe Railroad Co 439,031 12,300 CSX Corp 272,906 2,000 Galileo International Inc 34,000 ------------- 926,350 ------------- UTILITIES -- 0.4% 7,100 Citizens Utilities, Class B* 108,275 8,100 Coastal Corp 340,706 2,139 Dynegy Inc 100,266 5,400 El Paso Energy Corp 200,138 1,300 Oneok Inc 29,494 ------------- 778,879 ------------- TOTAL COMMON STOCKS (COST $127,886,867) 200,646,952 -------------
See accompanying notes to the financial statements. 12 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 5.2% CASH EQUIVALENTS -- 2.7% $ 211,252 BankBoston Eurodollar Time Deposit, 6.1175%, due 4/28/00(a) 211,252 $ 415,798 First Union National Bank Time Deposit, 5.8125%, due 3/01/00(a) 415,798 $ 623,697 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(a) 623,697 276,605 Merrimac Cash Fund Premium Class(a) 276,605 $ 4,000,000 Prudential Securities Group, Inc. Master Note, 6.1875%, due 3/10/00(a) 4,000,000 ------------- 5,527,352 ------------- U.S. GOVERNMENT -- 0.4% $ 865,000 U.S. Treasury Bill, 5.689%, due 6/29/00(b) 848,825 ------------- REPURCHASE AGREEMENT -- 2.1% $ 4,222,650 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $4,223,231 and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest, of $4,307,103. 4,222,650 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $10,599,259) 10,598,827 ------------- TOTAL INVESTMENTS -- 103.2% (Cost $138,486,126) 211,245,779 Other Assets and Liabilities (net) -- (3.2%) (6,583,983) ------------- TOTAL NET ASSETS -- 100.0% $ 204,661,796 =============
See accompanying notes to the financial statements. 13 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000 NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Represents investments of security lending collateral (Note 1). (b) Security has been segregated to cover margin requirements on open financial futures contracts (Note 6). 14 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $138,486,126) (Note 1) $211,245,779 Dividends and interest receivable 111,300 Receivable for variation margin on open futures contracts (Notes 1 and 6) 36,240 Receivable for expenses waived or borne by Manager (Note 2) 8,962 ------------ Total assets 211,402,281 ------------ LIABILITIES: Payable upon return of securities loaned (Note 1) 5,527,352 Payable for Fund shares repurchased 1,097,833 Payable to affiliate for (Note 2): Management fee 52,118 Shareholder service fee 23,691 Accrued expenses 39,491 ------------ Total liabilities 6,740,485 ------------ NET ASSETS $204,661,796 ============ NET ASSETS CONSIST OF: Paid-in capital $117,575,585 Accumulated undistributed net investment income 59,467 Accumulated net realized gain 14,291,487 Net unrealized appreciation 72,735,257 ------------ $204,661,796 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $204,661,796 ============ SHARES OUTSTANDING: Class III 41,348,373 ============ NET ASSET VALUE PER SHARE: Class III $ 4.95 ============
See accompanying notes to the financial statements. 15 GMO GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $353) $ 1,129,063 Interest (including securities lending income of $23,370) 589,730 ----------- Total income 1,718,793 ----------- EXPENSES: Management fee (Note 2) 579,315 Custodian and transfer agent fees 52,740 Audit fees 37,868 Legal fees 3,939 Registration fees 2,078 Trustees fees (Note 2) 2,008 Miscellaneous 2,647 Fees waived or borne by Manager (Note 2) (101,280) ----------- 579,315 Shareholder service fee (Note 2) Class III 263,325 ----------- Net expenses 842,640 ----------- Net investment income 876,153 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments 34,022,505 Closed futures contracts 1,013,219 Closed swap contracts 2,486,982 ----------- Net realized gain 37,522,706 ----------- Change in net unrealized appreciation (depreciation) on: Investments 28,449,619 Open futures contracts 89,159 Open swap contracts (39,789) ----------- Net unrealized gain 28,498,989 ----------- Net realized and unrealized gain 66,021,695 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $66,897,848 ===========
16 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 876,153 $ 1,101,856 Net realized gain 37,522,706 35,847,656 Change in net unrealized appreciation (depreciation) 28,498,989 (1,539,965) ------------ ------------ Net increase in net assets from operations 66,897,848 35,409,547 ------------ ------------ Distributions to shareholders from: Net investment income Class III (909,886) (1,131,539) ------------ ------------ Total distributions from net investment income (909,886) (1,131,539) ------------ ------------ Net realized gains Class III (33,701,424) (37,976,729) ------------ ------------ Total distributions from net realized gains (33,701,424) (37,976,729) ------------ ------------ (34,611,310) (39,108,268) ------------ ------------ Net share transactions: (Note 5) Class III 14,291,017 (41,140,532) ------------ ------------ Increase (decrease) in net assets resulting from net share transactions 14,291,017 (41,140,532) ------------ ------------ Total increase (decrease) in net assets 46,577,555 (44,839,253) NET ASSETS: Beginning of period 158,084,241 202,923,494 ------------ ------------ End of period (including accumulated undistributed net investment income of $59,467 and $93,200, respectively) $204,661,796 $158,084,241 ============ ============
See accompanying notes to the financial statements. 17 GMO GROWTH FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 4.14 $ 4.38 $ 5.18 $ 5.65 $ 4.45 -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.02 0.03 0.04 0.07 0.08 Net realized and unrealized gain 1.71 0.89 1.41 1.03 1.54 -------- -------- -------- -------- -------- Total from investment operations 1.73 0.92 1.45 1.10 1.62 -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.02) (0.03) (0.06) (0.08) (0.07) From net realized gains (0.90) (1.13) (2.19) (1.49) (0.35) -------- -------- -------- -------- -------- Total distributions (0.92) (1.16) (2.25) (1.57) (0.42) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 4.95 $ 4.14 $ 4.38 $ 5.18 $ 5.65 ======== ======== ======== ======== ======== TOTAL RETURN(a) 45.24% 22.90% 36.37% 21.64% 37.77% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $204,662 $158,084 $202,923 $244,183 $391,366 Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48% 0.48% Net investment income to average daily net assets 0.50% 0.64% 0.79% 1.21% 1.54% Portfolio turnover rate 48% 50% 60% 100% 76% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: --(b) $ 0.01 $ 0.01 $ 0.01 --(b)
(a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Fees and expenses waived or borne by the Manager were less than $0.01 per share. 18 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Growth Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term growth of capital. The Funds benchmark is the Russell 1000 Growth Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the 19 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund loaned securities having a market value of $5,407,186 collateralized by cash in the amount of $5,527,352 which was invested in short-term instruments. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund enters into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The Fund also enters into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the 20 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make payment to the counterparty, respectively. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. There were no open swap agreements as of February 29, 2000. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. 21 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .14 % of the amount invested. All purchase premiums are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $2,599 in purchase premiums. There is no premium for redemptions, reinvested distributions or in-kind transactions. Effective April 7, 2000, the Fund will no longer charge a purchase premium. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .50% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeded .33% of average daily net assets. 22 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $2,008. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $77,863,310 and $91,137,989 respectively. At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $138,737,529 $88,268,784 $(15,760,534) $72,508,250
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 84.2% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders could have a material effect. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ------------------------ ------------------------- Shares Amount Shares Amount Class III: ---------- ------------ ----------- ------------ Shares sold 411,884 $ 1,856,585 735,556 $ 3,204,280 Shares issued to shareholders in reinvestment of distributions 7,675,138 34,556,251 9,514,574 39,000,762 Shares repurchased (4,900,307) (22,121,819) (18,430,431) (83,345,574) ---------- ------------ ----------- ------------ Net increase (decrease) 3,186,715 $ 14,291,017 (8,180,301) $(41,140,532) ========== ============ =========== ============
23 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FUTURES CONTRACTS
Number of Contract Net Unrealized Contracts Type Expiration Date Value Depreciation ---------- ---------- --------------- ---------- -------------- Buys 3 S&P 500 March 2000 1,029,000 $(24,396) ========
At February 29, 2000, the Fund has sufficient cash and/or securities to cover any commitments or margin on open futures contracts. 24 GMO GROWTH FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 87% of distributions as net capital gain dividends. 25 GMO GROWTH FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are primarily responsible for the day-to-day management of the Fund's portfolio. Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Growth Fund returned 45.2% for the fiscal year ended February 29, 2000, as compared to 11.7% for the S&P 500 and 31.8% for the Russell 1000 Growth Index. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in common stocks throughout the period. For the fiscal year, large cap growth stocks outperformed large cap value stocks by 35.0% primarily due to the strong performance of technology stocks. Similarly, small cap growth stocks outperformed small cap value stocks by an even wider margin. Sector selection within the Fund was strong and accounted for the majority of value added. The Fund is underweight in large cap issues and overweight in small cap stocks. These positions added value for the fiscal year because of the significant outperformance of small cap stocks. The Fund's overweight in technology stocks coupled with underweight positions in underperforming sectors, including health care, consumer staples (particularly the beverage industry) and consumer discretionary stocks also added to relative performance. Overweighting materials/processing and auto/transportation stocks detracted from performance as these sectors underperformed the benchmark. Stock selection also added value for the year, albeit to a lesser extent than sector selection. Strong selection among technology, health care and producer durable stocks offset weak selection in consumer staple and multi-industry stocks. For the fiscal year, the MOMENTUM stock selection strategy performed well. The INTRINSIC VALUE strategy was neutral relative to the benchmark, while the NEGLECT and CASH FLOW strategies underperformed. OUTLOOK While the Fund currently maintains an overweight position in technology stocks, this position is likely to decline as our intrinsic value methodology demonstrates these stocks to be increasingly overvalued. We continue to maintain an underweight position in health care and consumer staple stocks. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO GROWTH FUND CLASS III SHARES AND THE RUSSELL 1000 GROWTH INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 12/30/88 1yr 5yr 10yr 45.04 32.39 21.97
[GRAPH]
Date GMO Growth Fund-III Russell 1000 Growth 2/28/90 9986 10000 3/31/90 10342 10398 6/30/90 11542 11451 9/30/90 9490 9706 12/31/90 10761 10770 3/31/91 12936 12702 6/30/91 12551 12580 9/30/91 13256 13459 12/31/91 15202 15202 3/31/92 14382 14451 6/30/92 14098 14295 9/30/92 14926 14924 12/31/92 15842 15965 3/31/93 15911 15831 6/30/93 15416 15585 9/30/93 15840 15816 12/31/93 16571 16427 3/31/94 15363 15704 6/30/94 15521 15545 9/30/94 16779 16740 12/31/94 16852 16865 3/31/95 18461 18472 6/30/95 20135 20289 9/30/95 22357 22131 12/31/95 23567 23139 3/31/96 24571 24380 6/30/96 26322 25931 9/30/96 27058 26865 12/31/96 28374 28486 3/31/97 28548 28638 6/30/97 33391 34055 9/30/97 37862 36614 12/31/97 36703 37169 3/31/98 42213 42800 6/30/98 43774 44748 9/30/98 39536 40692 12/31/98 50392 51577 3/31/99 53307 54855 6/30/99 56905 56967 9/30/99 55299 54878 12/31/99 70065 68678 2/29/00 73015 68658
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 14 bp on the purchase. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Emerging Country Debt Share Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian, provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ MUTUAL FUND -- 100.0% 9,871,065 GMO Emerging Country Debt Fund (Cost $90,593,536) 86,273,108 ------------ SHORT-TERM INVESTMENTS -- 0.0% REPURCHASE AGREEMENT -- 0.0% $ 15,969 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $15,971 and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest, of $16,288. 15,969 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $15,969) 15,969 ------------ TOTAL INVESTMENTS -- 100.0% (Cost $90,609,505) 86,289,077 Other Assets and Liabilities (net) -- (0.0%) (9,001) ------------ TOTAL NET ASSETS -- 100.0% $ 86,280,076 ============
See accompanying notes to the financial statements. 1 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $90,609,505) (Note 1) $86,289,077 Receivable for expenses waived or borne by Manager (Note 2) 3,167 ----------- Total assets 86,292,244 ----------- LIABILITIES: Accrued expenses 12,168 ----------- Total liabilities 12,168 ----------- NET ASSETS $86,280,076 =========== NET ASSETS CONSIST OF: Paid-in capital $90,601,820 Accumulated undistributed net realized loss (1,316) Net unrealized depreciation (4,320,428) ----------- $86,280,076 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $86,280,076 =========== SHARES OUTSTANDING: Class III 9,918,037 =========== NET ASSET VALUE PER SHARE: Class III $ 8.70 ===========
2 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 9,369,314 Interest 2,443 ----------- Total income 9,371,757 ----------- EXPENSES: Audit fees 10,982 Custodian and transfer agent fees 9,221 Legal fees 3,521 Trustees fees (Note 2) 792 Registration fees 29 Miscellaneous 1,739 Fees waived or borne by Manager (Note 2) (26,284) ----------- Net expenses -- ----------- Net investment income 9,371,757 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (1,316) Realized gain distributions from investment company shares 1,062,790 ----------- Net realized gain 1,061,474 ----------- Change in net unrealized appreciation (depreciation) on investments 14,631,128 ----------- Net realized and unrealized gain 15,692,602 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $25,064,359 ===========
See accompanying notes to the financial statements. 3 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD FROM JULY 20,1998 YEAR ENDED (COMMENCEMENT OF OPERATIONS) FEBRUARY 29, 2000 TO FEBRUARY 28, 1999 ----------------- ---------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 9,371,757 $ 167,273 Net realized gain 1,061,474 -- Change in net unrealized appreciation (depreciation) 14,631,128 (18,951,556) ------------ ------------ Net increase (decrease) in net assets from operations 25,064,359 (18,784,283) ------------ ------------ Distributions to shareholders from: Net investment income Class III (9,371,757) (168,000) ------------ ------------ Total distributions from net investment income (9,371,757) (168,000) ------------ ------------ In excess of net investment income Class III (963,503) -- ------------ ------------ Total distributions in excess of net investment income (963,503) -- ------------ ------------ Net realized gains Class III (103,181) -- ------------ ------------ Total distributions from net realized gains (103,181) -- ------------ ------------ (10,438,441) (168,000) ------------ ------------ Net share transactions: (Note 5) Class III 30,438,441 60,168,000 ------------ ------------ Increase in net assets resulting from net share transactions 30,438,441 60,168,000 ------------ ------------ Total increase in net assets 45,064,359 41,215,717 NET ASSETS: Beginning of period 41,215,717 -- ------------ ------------ End of period (including accumulated undistributed net investment income of $0 and $0, respectively) $ 86,280,076 $ 41,215,717 ============ ============
4 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JULY 20, 1998 (COMMENCEMENT YEAR ENDED OF OPERATIONS) THROUGH FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 6.84 $ 10.00 ------- ------- Income from investment operations: Net investment income(a) 1.10 0.03 Net realized and unrealized gain (loss) 1.97 (3.16) ------- ------- Total from investment operations 3.07 (3.13) ------- ------- Less distributions to shareholders: From net investment income (1.09) (0.03) In excess of net investment income (0.11) -- From net realized gains (0.01) -- ------- ------- Total distributions (1.21) (0.03) ------- ------- NET ASSET VALUE, END OF PERIOD $ 8.70 $ 6.84 ======= ======= TOTAL RETURN(b) 46.71% (31.32)%+ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $86,280 $41,216 Net expenses to average daily net assets(c) 0.00% 0.00%* Net investment income to average daily net assets(a) 14.22% 0.64%* Portfolio turnover rate 0% 0% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: --(d) --(d)
* Annualized (a) Recognition of net investment income is affected by the timing of the declaration of dividends by GMO Emerging Country Debt Fund. (b) The total returns would have been lower had certain expenses not been waived during the periods shown. (c) Net expenses exclude expenses incurred indirectly through investment in underlying fund. (See Note 1.) (d) Fees and expenses waived or borne by the Manager were less than $0.01 per share. + Not annualized. See accompanying notes to the financial statements. 5 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Emerging Country Debt Share Fund (the "Fund"), is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in the Class III Shares of the GMO Emerging Country Debt Fund ("ECDF"), a portfolio of the Trust. GMO also serves as investment manager to ECDF. ECDF pursues its objectives by investing primarily in sovereign debt of developing countries in Asia, Latin America, the Middle East, Africa and Europe ("Emerging Countries"). The Fund's benchmark is the J.P. Morgan Emerging Markets Bond Index Global. The financial statements of ECDF should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of ECDF are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at 6 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $963,503 $(959,609) $(3,894)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for 7 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions are recorded on the ex-dividend date of ECDF. Interest income is recorded on the accrual basis. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur fees and expenses indirectly as a shareholder in ECDF (See Note 2). PURCHASES AND REDEMPTIONS OF FUND SHARES The Fund does not charge any purchase premium or redemption fee in connection with the purchase and sale of Fund shares. As a shareholder in ECDF, the Fund will indirectly bear ECDF's purchase premium and redemption fees which are .50% and .25%, respectively. These fees are paid to and retained by ECDF. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in ECDF. Investments in emerging country debt present certain risks that are not inherent in many other securities. Many emerging countries present elements of political and/or economic instability, which may result in the Fund's inability to collect on a timely basis, or in full, principal and interest payments. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. ECDF may acquire interests in securities or bank loans which are in default at the time of acquisition in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging country debt are relatively illiquid. Accordingly, ECDF may not be able to realize in an actual sale amounts approximating those used to value its holdings. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Manager does not charge an advisory fee or shareholder service fee. As a shareholder in ECDF, the Fund will indirectly bear all fees and expenses associated with an investment in ECDF. GMO, in 8 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- its capacity as Manager of ECDF, has agreed to waive a portion of its fee and bear other expenses to the extent that ECDF's annual expenses (including the management fee but excluding custody fees, brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed .35% of average daily net assets. Class III shares of ECDF also bear an annual shareholder service fee of .15% of ECDF's average daily net assets. The management fee earned by GMO in its capacity as Manager of ECDF is .35% of average daily net assets. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse ECDF to the extent that ECDF's total annual operating expense (excluding custody fees, brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeds the management fee. GMO has contractually agreed to reimburse all expenses directly incurred by the Fund until June 30, 2000 (excluding brokerage commissions, certain other transaction costs (including transfer taxes), and extraordinary expenses). The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $792. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $30,438,283 and $4,300 respectively. At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $90,610,821 $ -- $(4,321,744) $(4,321,744)
4. PRINCIPAL SHAREHOLDER At February 29, 2000, 100% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder could have a material effect. 9 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from July 20, 1998 (commencement of Year Ended operations) through February 29, 2000 February 28, 1999 ----------------------- ----------------------- Shares Amount Shares Amount Class III: ---------- ----------- ---------- ----------- Shares sold 2,574,003 $20,000,000 6,000,000 $60,000,000 Shares issued to shareholders in reinvestment of distributions 1,319,651 10,438,441 24,383 168,000 Shares repurchased -- -- -- -- ---------- ----------- ---------- ----------- Net increase 3,893,654 $30,438,441 6,024,383 $60,168,000 ========== =========== ========== ===========
6. OTHER During April 2000, contract settlement on certain swap agreements in ECDF was triggered by an event of default on the underlying debt instruments. The counterparty to the swap agreements made an initial determination of amounts due to ECDF under procedures specified by the swap agreements. ECDF does not agree with certain elements of the determination and is currently in negotiation with the counterparty over amounts approximating 10-20% of the settlement date value of these swaps. All undisputed amounts have been paid to ECDF by the counterparty. The outcome of those negotiations is not currently predictable. 10 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 1% of distributions as net capital gain dividends. 11 COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO EMERGING COUNTRY DEBT SHARE FUND CLASS III SHARES AND THE J.P. MORGAN EMERGING MARKETS BOND INDEX GLOBAL - BLENDED AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 7/20/1998 1yr 5yr 10yr (ITD) 46.71 N/A 0.47
[GRAPH]
Date GMO Emerging Country Debt Shares Fund J.P. Morgan EMBI Global J.P. Morgan Emerging Markets Plus 7/20/1998 10000 10000 10000 9/30/1998 6160 7586 7586 12/31/1998 6968 8338 8338 3/31/1999 7269 8760 8760 6/30/1999 7701 9220 9220 9/30/1999 7802 9330 9330 12/31/1999 9207 10504 10504 2/29/2000 10076 10898 10959
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Past performance is not indicative of future performance. Information is unaudited. *The manager changed the benchmark due to the belief that the EMBIG is more diversified and representative of the universe of emerging country debt. GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. Thomas F. Cooper and Mr. William L. Nemerever are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the Emerging Country Debt Share Fund returned 46.7% for the fiscal year ended February 29, 2000, which compared favorably with the 33.8% benchmark return. Consistent with the Fund's investment objectives and policies, the Fund was substantially invested in sovereign debt instruments of emerging countries throughout the period. Sovereign spreads on the J.P. Morgan Emerging Markets Bond Index Plus (EMBI+) declined from 1330 basis points to 816 basis points. Emerging country debt markets weathered several events, including the decision by Ecuador to default on its Brady bond obligations in September 1999, political developments in Russia and concerns about Y2K. Russia, the worst performing country in 1998, returned 166% in 1999, and was the best performing country in the universe. Although Brazil devalued its currency in January 1999, its debt returned 41%, as the country's new economic team managed economic policy adroitly. The portfolio's overweight exposure to Ecuador was hedged using credit default swaps. These swaps protected the portfolio when Ecuador defaulted on its Brady bonds. Most of the value added by the Fund relative to the Index occurred between October 1999 and February 2000. Underweight positions in Poland, Mexico, Panama and South Korea added value to the portfolio. Overweight positions in countries outside the Index, such as Algeria, Vietnam and Tunisia, also added value. In addition, security selection in Russia and Brazil contributed to the Fund's positive performance. The Fund remained fully invested throughout the period. The benchmark for this Fund was changed on January 1, 2000 from the J.P. Morgan Emerging Markets Bond Index Plus (EMBI+) to the J.P. Morgan Emerging Markets Bond Index Global (EMBIG). The EMBIG is a broader index with 26 countries, versus the 16 countries that are included in the EMBI+. The EMBIG offers additional exposure to Asia (15% versus 4%), and less to Latin America (67% versus 81%). The change in index is not expected to have a material effect on the management of this portfolio. OUTLOOK The Fund's strategy continues to emphasize issue selection with a preference for cheaper, long duration, less marketable issues that offer higher yields versus the new benchmark, the J.P. Morgan Emerging Markets Bond Index Global. The Fund is currently underweight in Ecuador, Mexico, Panama, Philippines, Poland, Russia, South Korea and Turkey. Our largest overweight positions (within the Index) are in Argentina, Bulgaria and Morocco. Jordan and Tunisia are the Fund's largest positions outside the benchmark universe. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Short-Term Income Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 25.0% U.S. GOVERNMENT -- 10.8% $ 4,728,870 U.S. Treasury Inflation Indexed Note, 3.63%, due 07/15/02 4,687,492 ------------- U.S. GOVERNMENT AGENCY -- 14.2% 303,333 Agency for International Development Floater (Support of Botswana), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 6.42%, due 10/01/12 294,233 1,950,300 Agency for International Development Floater (Support of C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 6.42%, due 10/01/12 1,891,791 2,000,990 Agency for International Development Floater (Support of Honduras), Variable Rate, 3 mo. U.S. Treasury Bill x 117%, 5.93%, due 10/01/11 1,930,956 86,859 Agency for International Development Floater (Support of Peru), Series A, Variable Rate, 6 mo. U.S. Treasury Bill + .35%, 5.99%, due 05/01/14 83,384 1,995,963 Small Business Administration Pool #502320, Variable Rate, Prime - 2.18%, 6.31%, due 08/25/18 2,005,943 ------------- 6,206,307 ------------- TOTAL DEBT OBLIGATIONS (COST $11,027,232) 10,893,799 ------------- MUTUAL FUND -- 71.9% 1,236,707 GMO Alpha Libor Fund 31,276,310 ------------- TOTAL MUTUAL FUND (COST $30,917,146) 31,276,310 -------------
See accompanying notes to the financial statements. 1 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
- ------------------------------------------------------------------------------ SHORT-TERM INVESTMENTS -- 5.5% COMMERCIAL PAPER -- 4.8% $2,100,000 Koch Industries Inc., 5.83%, due 3/01/00 2,100,000 ---------- REPURCHASE AGREEMENT -- 0.7% $ 279,522 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $279,560 and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest, of $285,112. 279,522 ---------- TOTAL SHORT-TERM INVESTMENTS (COST $2,379,522) 2,379,522 ---------- TOTAL INVESTMENTS -- 102.4% (Cost $44,323,900) 44,549,631 Other Assets and Liabilities (net) -- (2.4%) (1,058,468) ---------- TOTAL NET ASSETS -- 100.0% $43,491,163 ==========
Variable rates - The rates shown on variable rate notes are the current interest rates at February 29, 2000, which are subject to change based on the terms of the security. 2 See accompanying notes to the financial statements. GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $44,323,900) (Note 1) $44,549,631 Cash 4,015,883 Receivable for investments sold 1,504,773 Receivable for Fund shares sold 831,564 Interest receivable 163,488 ----------- Total assets 51,065,339 ----------- LIABILITIES: Payable for Fund shares repurchased 7,547,000 Payable to affiliate for (Note 2): Management fee 1,779 Shareholder service fee 5,340 Accrued expenses and other liabilities 20,057 ----------- Total liabilities 7,574,176 ----------- NET ASSETS $43,491,163 =========== NET ASSETS CONSIST OF: Paid-in capital $43,497,151 Accumulated undistributed net investment income 108,089 Accumulated net realized loss (339,808) Net unrealized appreciation 225,731 ----------- $43,491,163 =========== SHARES OUTSTANDING 4,520,663 =========== NET ASSET VALUE PER SHARE $ 9.62 ===========
See accompanying notes to the financial statements. 3 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $2,543,795 ---------- Total income 2,543,795 ---------- EXPENSES: Management fee (Note 2) 25,341 Audit fees 21,594 Custodian and transfer agent fees 12,606 Registration fees 3,867 Legal fees 2,089 Trustees fees (Note 2) 654 Miscellaneous 1,740 Fees waived or borne by Manager (Note 2) (42,550) ---------- 25,341 Shareholder service fee (Note 2) 76,023 ---------- Net expenses 101,364 ---------- Net investment income 2,442,431 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized loss on investments (313,585) ---------- Change in net unrealized appreciation (depreciation) on investments 528,627 ---------- Net realized and unrealized gain 215,042 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,657,473 ==========
4 See accompanying notes to the financial statements. GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 2,442,431 $ 1,817,518 Net realized loss (313,585) (22,156) Change in net unrealized appreciation (depreciation) 528,627 (360,921) ----------- ----------- Net increase in net assets from operations 2,657,473 1,434,441 ----------- ----------- Distributions to shareholders from: Net investment income (2,673,480) (1,788,988) ----------- ----------- (2,673,480) (1,788,988) ----------- ----------- Fund share transactions: (Note 5) Proceeds from sale of shares 15,635,155 77,435,093 Net asset value of shares issued to shareholders in payment of distributions declared 2,605,023 1,459,945 Cost of shares repurchased (28,120,405) (62,529,846) ----------- ----------- Net increase (decrease) in net assets resulting from Fund share transactions (9,880,227) 16,365,192 ----------- ----------- Total increase (decrease) in net assets (9,896,234) 16,010,645 NET ASSETS: Beginning of period 53,387,397 37,376,752 ----------- ----------- End of period (including accumulated undistributed net investment income of $108,089 and $339,138, respectively) $43,491,163 $53,387,397 =========== ===========
See accompanying notes to the financial statements. 5 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.63 $ 9.81 $ 9.78 $ 9.77 $ 9.56 ------- ------- ------- ------- ------- Income from investment operations: Net investment income(a) 0.46+ 0.57 0.55 0.47 0.57 Net realized and unrealized gain (loss) 0.05 (0.16) 0.03 0.06 0.20 ------- ------- ------- ------- ------- Total from investment operations 0.51 0.41 0.58 0.53 0.77 ------- ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.52) (0.59) (0.55) (0.52) (0.56) ------- ------- ------- ------- ------- Total distributions (0.52) (0.59) (0.55) (0.52) (0.56) ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.62 $ 9.63 $ 9.81 $ 9.78 $ 9.77 ======= ======= ======= ======= ======= TOTAL RETURN(B) 5.42% 4.29% 6.10% 5.62% 8.32% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $43,491 $53,387 $37,377 $40,937 $11,066 Net expenses to average daily net assets 0.20% 0.20% 0.20% 0.20% 0.25% Net investment income to average daily net assets(a) 4.82% 5.50% 5.73% 5.88% 6.49% Portfolio turnover rate 178% 76% 50% 287% 139% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.03 $ 0.03 $ 0.03 $ 0.03
+ Computed using average shares outstanding throughout the period. (a) Net investment income for the year ended February 29, 2000 is affected by the timing of the declaration of dividends by other Funds of the Trust in which the Fund invests. (b) The total returns would have been lower had certain expenses not been waived during the periods shown. 6 See accompanying notes to the financial statements. GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Short-Term Income Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares. The Fund seeks to provide current income to the extent consistent with the preservation of capital and liquidity through investment in a portfolio of high-quality fixed income instruments. The Fund's benchmark is the Salomon Smith Barney 3 Month T-Bill Index. At February 29, 2000, 71.9% of the Fund is invested in GMO Alpha Libor Fund, a separate fund of GMO Trust managed by GMO. Alpha Libor invests primarily in relatively high quality, low volatility fixed income securities. The financial statements of the Alpha Libor Fund should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates market value. Shares of other Funds of the Trust are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary 7 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market-makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold. At February 29, 2000, the total value of these securities represented 10% of net assets, substantially all of which consist of U.S. Government backed securities. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities 8 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund had no securities on loan. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts and amortization of premiums. Dividend income is recognized on the ex-dividend date. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon the inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 9 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .05% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of the Fund at the annual rate of .15%. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fees. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .25% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeded .05% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $654. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES For the year ended February 29, 2000, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Sales ----------- ----------- U.S. Government securities $ -- $ 520,504 Investments (non-U.S. Government securities) 85,762,273 87,346,396
During the year ended February 29, 2000, the Fund exchanged securities with a market value of $30,668,721 for shares of GMO Alpha Libor Fund with a value equal to that market value in taxable transactions. Such amounts are included in purchases and sales above. 10 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $44,323,900 $365,776 $(140,045) $225,731
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 75.1% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders could have a material effect. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ----------------- ----------------- Shares sold 1,627,899 8,045,249 Shares issued to shareholders in reinvestment of distributions 273,049 150,962 Shares repurchased (2,924,097) (6,463,182) ----------- ----------- Net increase (decrease) (1,023,149) 1,733,029 Fund shares: Beginning of period 5,543,812 3,810,783 ----------- ----------- End of period 4,520,663 5,543,812 =========== ===========
11 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- The Fund has elected to defer to March 1, 2000 post October Capital losses of $272,374. At February 29, 2000 the Fund had capital loss carryforwards available to offset future capital gains, if any, of the following amounts:
Year of Expiration Amount ------------------ ------- 2002 $ 4,067 2007 $22,157 2008 $41,210
12 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. Thomas F. Cooper and Mr. William L. Nemerever are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The GMO Short-Term Income Fund returned 5.4% for the fiscal year ended February 29, 2000, as compared with 4.8% for the Salomon Smith Barney 3-Month Treasury Bill Index. Consistent with the Fund's investment objectives and policies, the Fund was substantially invested in high-quality, fixed income instruments throughout the period. The Fund outperformed the benchmark during the fiscal year by 59 basis points. While spreads relative to U.S. Treasuries declined during the period, they remained high relative to historical levels. The Fund benefited from capital gains and from the higher spreads. At the fiscal year end approximately 71% of the Fund was invested in highly-rated, floating rate, asset-backed securities (including holdings of GMO Alpha LIBOR Fund), 17% in U.S. Government-backed bonds, and 12% in U.S. Treasury notes and cash equivalents. The asset-backed issues included issues backed by auto, truck, credit card and health care receivables. The additional yield provided by these holdings plus the capital gains due to its longer-than-benchmark maturity accounted for the Fund's performance. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO SHORT-TERM INCOME FUND CLASS III SHARES AND THE SALOMON SMITH BARNEY 3 MONTH T-BILL INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 4/18/90 1yr 5yr 10yr (ITD) 5.42 5.94 5.98
[GRAPH]
Date GMO Short Term Income Fund Salomon Smith Barney 3 Mo. T-Bill 4/18/90 10000 10000 6/30/90 10164 10160 9/30/90 10366 10357 12/31/90 10570 10545 3/31/91 10753 10712 6/30/91 10901 10866 9/30/91 11052 11018 12/31/91 11439 11152 3/31/92 11412 11264 6/30/92 11719 11372 9/30/92 12098 11467 12/31/92 12101 11556 3/31/93 12422 11643 6/30/93 12546 11730 9/30/93 12685 11821 12/31/93 12785 11912 3/31/94 12850 12006 6/30/94 12877 12123 9/30/94 12984 12258 12/31/94 12990 12418 3/31/95 13379 12592 6/30/95 13733 12775 9/30/95 13978 12955 12/31/95 14285 13132 3/31/96 14417 13301 6/30/96 14567 13470 9/30/96 14812 13645 12/31/96 15056 13822 3/31/97 15243 13997 6/30/97 15495 14178 9/30/97 15748 14361 12/31/97 15976 14548 3/31/98 16206 14735 6/30/98 16403 14922 9/30/98 16667 15107 12/31/98 16692 15280 3/31/99 16902 15448 6/30/99 17110 15622 9/30/99 17324 15797 12/31/99 17542 15994 2/29/00 17745 16133
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period. The Fund operated as a money market fund from April 18, 1990 to June 30, 1991. Subsequently, the Fund became a short-term income fund. Past performance is not indicative of future performance. Information is unaudited. GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Inflation Indexed Bond Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 102.8% NEW ZEALAND -- 0.9% NZD 1,000,000 New Zealand Index Linked Bond Series 216, 4.50%, due 02/15/16 469,430 ---------- UNITED STATES -- 101.9% ASSET BACKED SECURITIES -- 6.2% USD 400,279 Constellation Series 99-1A, 144A, 5.73%, due 04/18/02 400,029 USD 3,000,000 Oasis CBO Ltd, 144A, Variable Rate, 6 mo. LIBOR + .38%, 6.42%, due 05/30/11 2,835,000 ---------- 3,235,029 ---------- CORPORATE DEBT -- 2.0% USD 1,200,000 JP Morgan and Co. Series A, Variable Rate, CPI + 4.00%, 6.43%, due 02/15/12 1,040,400 ---------- U.S. GOVERNMENT -- 53.4% USD 15,970,656 U.S. Treasury Inflation Indexed Bond, 3.88%, due 04/15/29 15,202,068 USD 1,040,560 U.S. Treasury Inflation Indexed Bond, 3.63%, due 04/15/28 948,861 USD 11,934,939 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09(a) 11,554,512 ---------- 27,705,441 ---------- U.S. GOVERNMENT AGENCY -- 40.3% USD 8,625,000 Federal Home Loan Bank, Variable Rate, CPI + 3.15%, 5.59%, due 02/15/02 8,392,900 USD 13,809,380 Tennessee Valley Authority (Indexed Principal), 3.38%, due 01/15/07 12,549,810 ---------- 20,942,710 ---------- TOTAL UNITED STATES 52,923,580 ---------- TOTAL DEBT OBLIGATIONS (COST $54,526,620) 53,393,010 ----------
See accompanying notes to the financial statements. 1 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 0.1% REPURCHASE AGREEMENT -- 0.1% USD 49,203 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $49,210 and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest of $50,188. 49,203 ---------- TOTAL SHORT-TERM INVESTMENTS (COST $49,203) 49,203 ---------- TOTAL INVESTMENTS -- 102.9% (Cost $54,575,823) 53,442,213 Other Assets and Liabilities (net) -- (2.9%) (1,491,372) ---------- TOTAL NET ASSETS -- 100.0% $51,950,841 ==========
NOTES TO SCHEDULE OF INVESTMENTS: - ------------------------------------------------------------------------------- 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. Variable rates - The rates shown on variable rate notes are the current interest rates at February 29, 2000, which are subject to change based on the terms of the security. CURRENCY ABBREVIATIONS: NZD - New Zealand Dollars USD - United States Dollar
(a) All or a portion of this security has been segregated to cover collateral requirements on reverse repurchase agreements (Note 6). 2 See accompanying notes to the financial statements. GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $54,575,823) (Note 1) $53,442,213 Interest receivable 438,143 Net receivable for open forward foreign currency contracts (Notes 1 and 6) 22,640 Receivable for expenses waived or borne by Manager (Note 2) 7,125 ----------- Total assets 53,910,121 ----------- LIABILITIES: Payable for Fund shares repurchased 68,000 Payable to affiliate for (Note 2): Management fee 4,083 Shareholder service fee 6,024 Payable for reverse repurchase agreements (Notes 1 and 6) 1,849,755 Accrued expenses and other liabilities 31,418 ----------- Total liabilities 1,959,280 ----------- NET ASSETS $51,950,841 =========== NET ASSETS CONSIST OF: Paid-in capital $53,451,686 Accumulated undistributed net investment income 407,403 Accumulated net realized loss (796,981) Net unrealized depreciation (1,111,267) ----------- $51,950,841 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $51,950,841 =========== SHARES OUTSTANDING: Class III 5,344,578 =========== NET ASSET VALUE PER SHARE: Class III $ 9.72 ===========
See accompanying notes to the financial statements. 3 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $3,004,277 ---------- Total income 3,004,277 ---------- EXPENSES: Management fee (Note 2) 41,797 Interest expense (Notes 1 and 6) 188,144 Audit fees 30,716 Custodian fees 17,531 Registration fees 3,568 Legal fees 1,535 Trustees fees (Note 2) 470 Miscellaneous 1,026 Fees waived or borne by Manager (Note 2) (54,846) ---------- 229,941 ---------- Shareholder service fee (Note 2) Class III 62,695 ---------- Net expenses 292,636 ---------- Net investment income 2,711,641 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (537,774) Foreign currency, forward contracts and foreign currency related transactions 27,300 ---------- Net realized loss (510,474) ---------- Change in net unrealized appreciation (depreciation) on: Investments (876,039) Foreign currency, forward contracts and foreign currency related transactions 8,650 ---------- Net unrealized loss (867,389) ---------- Net realized and unrealized loss (1,377,863) ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,333,778 ==========
4 See accompanying notes to the financial statements. GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 2,711,641 $ 1,498,147 Net realized loss (510,474) (208,075) Change in net unrealized appreciation (depreciation) (867,389) (23,506) ----------- ----------- Net increase in net assets from operations 1,333,778 1,266,566 ----------- ----------- Distributions to shareholders from: Net investment income Class III (2,424,991) (1,437,398) ----------- ----------- Total distributions from net investment income (2,424,991) (1,437,398) ----------- ----------- Net share transactions: (Note 5) Class III 27,894,644 (341,835) ----------- ----------- Increase (decrease) in net assets resulting from net share transactions 27,894,644 (341,835) ----------- ----------- Total increase (decrease) in net assets 26,803,431 (512,667) NET ASSETS: Beginning of period 25,147,410 25,660,077 ----------- ----------- End of period (including accumulated undistributed net investment income of $407,403 and $93,454, respectively) $51,950,841 $25,147,410 =========== ===========
See accompanying notes to the financial statements. 5 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, --------------------------- 2000 1999 1998* ------- ------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.88 $ 10.04 $ 10.00 ------- ------- ------- Income from investment operations: Net investment income 0.65+ 0.61 0.42+ Net realized and unrealized loss (0.30) (0.18) (0.04) ------- ------- ------- Total from investment operations 0.35 0.43 0.38 ------- ------- ------- Less distributions to shareholders: From net investment income (0.51) (0.59) (0.30) In excess of net investment income -- -- (0.02) From net realized gains -- -- --(a) From tax return of capital -- -- (0.02) ------- ------- ------- Total distributions (0.51) (0.59) (0.34) ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.72 $ 9.88 $ 10.04 ======= ======= ======= TOTAL RETURN(b) 3.57% 4.28% 3.77%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $51,951 $25,147 $25,660 Net operating expenses to average daily net assets 0.25% 0.25% 0.25%** Interest expense to average daily net assets 0.45% -- -- Total net expenses to average daily net assets 0.70%(c) 0.25% 0.25%** Net investment income to average daily net assets 6.49% 4.93% 4.48%** Portfolio turnover rate 112% 94% 9% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.04 $ 0.04
* Period from March 31, 1997 (commencement of operations) to February 28, 1998. ** Annualized. + Computed using average shares outstanding throughout the period. ++ Not annualized. (a) The per share distributions from net realized gains was $0.002. (b) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (c) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. 6 See accompanying notes to the financial statements. GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Inflation Indexed Bond Fund (the "Fund"), is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in government bonds that are indexed or otherwise "linked" to general measures of inflation in the country of issue ("inflation indexed bonds"). The Fund's benchmark is the Lehman Brothers Treasury Inflation Notes Index. Inflation indexed securities issued by the U.S. Treasury are fixed income securities whose principal value is periodically adjusted according to the rate of U.S. inflation. Inflation indexed bonds issued by a foreign government are generally adjusted to reflect a comparable local inflation index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. Securities may be valued by independent pricing services which use prices provided by market-makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. 7 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Certain investments in securities held by the Fund were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. At February 29, 2000, the total value of these securities represented 30% of net assets, substantially all of which consist of U.S. Government backed securities and highly rated collateralized debt obligations. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currency the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through a currency contract as of February 29, 2000. 8 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund was sold may decline below the contracted repurchase price under the agreement. At February 29, 2000, the Fund had entered into a reverse repurchase agreement having a market value of $1,849,755, collateralized by a security with a market value of $1,883,693. See Note 6 for a summary of open reverse repurchase agreements as of February 29, 2000. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund had no securities on loan. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. 9 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to section 988 gains. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $27,299 $(27,299) $ --
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon the inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities is recorded as interest income. 10 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases and fee on redemptions of Fund shares is .10% of the amount invested or redeemed. These fees will be reduced by 50% with respect to any portion of a purchase or redemption that is offset by a corresponding redemption or purchase, respectively, occurring on the same day. In addition, the purchase premium or redemption fee for the Fund will be reduced by 50% if the purchaser makes an in-kind purchase of Fund shares or if the purchase or redemption is part of a transfer from or to another Fund where the Manager is able to transfer securities among the Funds to effect the transaction. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $29,494 in purchase premiums and $3,128 in redemption fees. There is no premium for reinvested distributions or in-kind transactions. Effective March 15, 2000, the Fund will no longer charge a premium on cash purchases or a fee on redemptions of Fund shares. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .10% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .25% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeded .10% of average daily net assets. 11 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $470. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES For the year ended February 29, 2000 cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Sales ----------- ----------- U.S. Government securities $59,189,417 $46,284,638 Investments (non-U.S. Government securities) 21,525,521 4,000,000
At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $54,635,153 $309,938 $(1,502,878) $(1,192,940)
4. PRINCIPAL SHAREHOLDER At February 29, 2000, 10.8% of the outstanding shares of the Fund were held by one shareholder. 12 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares, including the purchase premiums and redemption fees received by the Fund, were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ----------------------- ------------------------- Shares Amount Shares Amount Class III: ---------- ----------- ----------- ------------ Shares sold 2,953,506 $29,494,235 1,673,497 $ 16,929,247 Shares issued to shareholders in reinvestment of distributions 168,614 1,618,872 99,325 980,335 Shares repurchased (321,584) (3,218,463) (1,785,715) (18,251,417) ---------- ----------- ----------- ------------ Net increase (decrease) 2,800,536 $27,894,644 (12,893) $ (341,835) ========== =========== =========== ============
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FORWARD CURRENCY CONTRACTS
Settlement Units Net Unrealized Date Deliver of Currency Value Appreciation ---------- ------- ----------- -------- -------------- Sales 3/30/00 NZD 1,000,000 $485,740 $22,640 =======
13 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- REVERSE REPURCHASE AGREEMENT
Face Value Description Market Value ---------- ------------------------------------------------------- ------------ $1,849,755 J.P. Morgan, 5.90%, dated 2/29/00, to be repurchased on demand at face value plus accrued interest. $ 1,849,755 ===========
Average balance outstanding $3,995,818 Average interest rate 5.16% Maximum balance outstanding $9,476,874 Average shares outstanding 4,348,182 Average balance per share outstanding $ .92
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund had entered into reverse repurchase agreements. 14 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- The Fund has elected to defer to March 1, 2000 post October capital losses of $29,052. At February 29, 2000, the Fund had capital loss carryforwards available to offset future capital gains, if any, of the following amounts:
Year of Expiration Amount ------------------ ------ 2007 $108,055 2008 $600,546
15 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. Thomas F. Cooper and Mr. William L. Nemerever are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Inflation Indexed Bond Fund returned 3.6% during the fiscal year that ended February 29, 2000, compared to 3.3% for the Lehman Brothers Inflation Notes Index. Consistent with the Fund's investment objectives and policies, the Fund was substantially invested throughout the period in U.S. government and foreign bonds that are indexed or otherwise linked to general measures of inflation in the country of issue. The Fund added 0.3% in value to its benchmark during the fiscal year. Real (or inflation-adjusted) yields on U.S. inflation-indexed bonds in the United States currently are 4.3%. In addition to inflation-indexed bonds issued by the U.S. Treasury Department, the Fund holds inflation-indexed bonds issued by various U.S. Government agencies, as well as one bond issued by a U.S. corporation. The Fund also is permitted to own securities of foreign countries that are not in the benchmark. Currently, the only foreign holding is an inflation-indexed bond issued by the Government of New Zealand. In addition, the Fund maintains an interest rate exposure quite similar to that of its benchmark. OUTLOOK The Fund will continue to focus on attractive inflation-indexed issues of the U.S. government, but will also attempt to broaden its foreign exposure. The Fund may also enter into interest rate swaps as a means of outperforming its benchmark. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO INFLATION INDEXED BOND FUND CLASS III SHARES AND THE LEHMAN BROTHERS TREASURY INFLATION NOTES INDEX - BLENDED AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 3/31/97 1yr 5yr 10yr (ITD) 3.36 N/A 3.91
[GRAPH]
Date GMO Inflation Indexed Bond Fund-III Lehman Brothers Inflation Notes-Blended* 3/31/97 9990 10000 6/30/97 10080 10099 9/30/97 10240 10226 12/31/97 10326 10332 3/31/98 10357 10368 6/30/98 10491 10507 9/30/98 10739 10793 12/31/98 10756 10741 3/31/99 10843 10785 6/30/99 10997 10938 9/30/99 11026 10994 12/31/99 11046 10994 2/29/00 11185 11146
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 10 bp on the purchase and 10 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. * Lehman Inflation Notes represent the Merrill Lynch Inflation Notes performance through to 9/30/97 and the Lehman Inflation Notes performance thereafter. GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Alpha LIBOR Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for the period from December 31, 1999 (commencement of operations) through February 29, 2000, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ DEBT OBLIGATIONS -- 103.5% ASSET BACKED SECURITIES -- 93.9% 18,000,000 Aircraft Finance Trust Series 99-1A Class A1, Variable Rate, 1 mo. LIBOR + .48%, 6.36%, due 05/15/24 17,966,250 7,000,000 American Express Credit Account Master Trust Series 00-2 Class A, Variable Rate, 1 mo. LIBOR + .17%, 6.23%, due 09/17/07 7,000,000 6,000,000 American Express Credit Account Master Trust Series 99-5 Class A, Variable Rate, 1 mo. LIBOR + .24%, 6.13%, due 02/15/07 6,018,750 10,000,000 Anfield Road I Ltd. Class A, Variable Rate, 6 mo. LIBOR + .25%, 5.83%, due 11/06/06 9,842,187 13,000,000 Augusta Funding Ltd. X, 144A, Variable Rate, 3mo. LIBOR + .25%, 6.43%, due 06/30/17 12,599,844 5,000,000 BEA CBO Series 98-1A Class A2A, 144A, 6.72%, due 06/15/10 4,517,969 5,000,000 Big Flower Receivables Master Trust Series 96-2 Class A, Variable Rate, LIBOR +.25%, 6.13%, due 04/25/03 4,925,000 6,590,000 Brazos Student Loan Finance Corp Series 96-B Class A4, Variable Rate, 3 mo. U.S. Treasury Bill + .50%, 6.21%, due 12/01/02 6,582,792 4,000,000 Chase Credit Card Master Trust Series 98-6 Class A, Variable Rate, 1 mo. LIBOR + .26%, 6.15%, due 09/15/04 4,010,000 9,000,000 Chevy Chase Master Credit Card Trust Series 96-A Class A, Variable Rate, 1 mo. LIBOR + .15%, 6.04%, due 02/15/05 8,997,187 23,800,000 Chevy Chase Master Credit Card Trust Series 98-A, Variable Rate, 1 mo. LIBOR + .15%, 6.04%, due 10/16/06 23,750,727 10,000,000 Chyps CBO Series 97-1A Class A2A, 144A, 6.72%, due 01/15/10 9,190,625 4,000,000 Circuit City Credit Card Master Trust Series 96-1 Class A, Variable Rate, 1 mo. LIBOR + .17%, 6.06%, due 10/15/06 3,989,375 1,601,115 Constellation Series 99-1A, 144A, 5.73%, due 04/18/02 1,600,115 10,000,000 Discover Card Master Trust I Series 00-1 Class A, Variable Rate, 1 mo. LIBOR + .17%, 6.06%, due 08/16/07 9,997,656 22,045,000 Discover Card Master Trust I Series 94-2 Class A, Variable Rate, 1 mo. LIBOR + .35%, 6.24%, due 10/16/04(a) 22,118,196 10,000,000 Discover Card Master Trust I Series 97-3 Class A, Variable Rate, 1 mo. LIBOR + .13%, 6.01%, due 04/16/07 9,987,500 6,000,000 EMAC Series 98-1 Class A2, 144A, 6.38%, due 01/15/25 5,604,375 5,000,000 First Deposit Master Trust Series 96-1 Class A, Variable Rate, 1 mo. LIBOR +.17%, 6.06%, due 08/15/07 4,992,383 5,000,000 First USA Credit Card Master Trust Series 98-5 Class A, Variable Rate, 1 mo. LIBOR + .10%, 5.98%, due 04/18/06 4,991,992 20,000,000 Fleet Credit Card Master Trust II Series 99-A Class A, Variable Rate, 1 mo. LIBOR + .11%, 6.00%, due 09/15/04 19,993,750
See accompanying notes to the financial statements. 1 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ ASSET BACKED SECURITIES -- CONTINUED 10,238,462 Great Point CBO Ltd. Series 98-1A Class A1, 144A, Variable Rate, 6 mo. LIBOR + .30%, 6.39%, due 10/15/10 10,171,272 1,950,000 Keycorp Student Loan Trust Series 94-B Certificates, Variable Rate, 1 mo. LIBOR + .73%, 6.61%, due 11/25/21 1,947,075 5,000,000 MBNA Master Credit Card Trust Series 95-G Class A, Variable Rate, 1 mo. LIBOR + .21%, 6.10%, due 10/15/02 5,007,422 6,000,000 MBNA Master Credit Card Trust Series 95-J Class A, Variable Rate, 1 mo. LIBOR + .23%, 6.12%, due 04/15/05 6,015,234 7,000,000 MBNA Master Credit Card Trust Series 96-A Class A, Variable Rate, 1 mo. LIBOR + .21%, 6.10%, due 07/15/05 7,014,492 8,450,000 MBNA Master Credit Card Trust Series 97-J Class A, Variable Rate, 1 mo. LIBOR + .12%, 6.01%, due 02/15/07 8,439,768 6,000,000 MBNA Master Credit Card Trust Series 98-I Class A, Variable Rate, 1 mo. LIBOR + .26%, 6.15%, due 10/15/03 6,014,062 7,457,807 Northstar CBO Ltd. Series 97-2 Class A2, 144A, Variable Rate, Step Up, 6.62%, due 07/15/09 6,920,612 8,000,000 NPF VI, Inc. Series 99-1 Class A, 144A, 6.25%, due 02/01/03 7,784,000 2,500,000 NPF XII, Inc. Series 99-2 Class A, 144A, 7.05%, due 06/01/03 2,468,750 10,000,000 Pacific Life CBO Series 98-1A Class A2A, 144A, Variable Rate, Step Up, 6.56%, due 02/15/10 9,151,563 10,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A, Variable Rate, Step Up, 6.33%, due 09/15/09 9,843,750 5,000,000 SHYPPCO Finance Company Series 98-1 Class A-2B, 6.64%, due 06/15/10 4,562,500 2,620,000 SMS Student Loan Trust Series 94-B Certificates, Variable Rate, 1 mo. LIBOR + .75%, 6.56%, due 10/25/23 2,624,716 2,933,200 SMS Student Loan Trust Series 94-B Class A2, Variable Rate, 1 mo. LIBOR + .30%, 6.18%, due 04/25/16 2,936,720 5,000,000 Starvest Emerging Markets CBO-I Series 1A, Class A, Variable Rate, 6 mo. LIBOR + .19%, 144A, 6.41%, due 07/30/11 4,869,531 12,463,000 Team Fleet Financing Corp Series 98-3A Class A, 144A, 6.13%, due 10/25/04 11,948,901 11,152,308 The Money Store Business Loan Backed Trust Series 99-1 Class AN, Variable Rate, 1 mo. LIBOR +.50%, 6.39%, due 09/15/17 11,173,219 ------------ 317,570,260 ------------ CORPORATE DEBT -- 4.0% 2,000,000 Banco Santander, Series MBIA, 6.50%, due 11/01/05 1,867,000 3,000,000 Eagle Pier Corp BV, Variable Rate, 6 mo. LIBOR + .25%, 6.21%, due 10/03/01 3,002,400 7,000,000 Pemex Finance Ltd. Series 1A1 Class A2, 144A, 6.30%, due 05/15/10 6,244,000
2 See accompanying notes to the financial statements. GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CORPORATE DEBT -- CONTINUED 2,500,000 Westralia Airports Corp, 144A, 6.48%, due 04/01/10 2,266,250 ------------ 13,379,650 ------------ STRUCTURED NOTES -- 1.1% 3,933,333 Polaris Funding Company, Variable Rate, 1 mo. LIBOR + .45%, 6.34%, due 01/07/05 3,852,823 ------------ U.S. GOVERNMENT AGENCY -- 4.5% 1,400,000 Agency for International Development Floater (Support of Belize), Variable Rate, 6 mo. U.S. Treasury Bill + .50%, 6.52%, due 01/01/14 1,365,000 4,334,000 Agency for International Development Floater (Support of C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 6.42%, due 10/01/12 4,203,980 4,000,000 Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10%, 6.15%, due 02/01/27 3,920,000 1,000,000 Federal Farm Credit Bank, Variable Rate, CPI + 3.00%, 5.42%, due 02/14/02 970,440 2,000,000 Federal Home Loan Bank, Variable Rate, CPI + 3.15%, 5.59%, due 02/15/02(b) 1,946,180 984,000 Ship Co 668, Series A, 8.50%, due 05/11/02 984,000 1,745,119 Small Business Administration Series 95-C, 6.88%, due 09/01/05 1,683,168 ------------ 15,072,768 ------------ TOTAL DEBT OBLIGATIONS (COST $349,790,165) 349,875,501 ------------ PRINCIPAL AMOUNT - ------------- CALL OPTIONS PURCHASED -- 0.0% OPTIONS ON FUTURES -- 0.0% 1,662,500 Eurodollar, Expires 3/13/00, Strike 93.75 91,437 ------------ TOTAL CALL OPTIONS PURCHASED (COST $64,999) 91,437 ------------
See accompanying notes to the financial statements. 3 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SHORT-TERM INVESTMENTS -- 3.9% COMMERCIAL PAPER -- 3.8% 13,000,000 Koch Industries Inc., 5.83%, due 3/01/00 13,000,000 ------------ REPURCHASE AGREEMENT -- 0.1% 206,979 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $207,007 and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest, of $211,119. 206,979 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $13,206,979) 13,206,979 ------------ TOTAL INVESTMENTS -- 107.4% (Cost $363,062,143) 363,173,917 Other Assets and Liabilities (net) -- (7.4%) (25,072,950) ------------ TOTAL NET ASSETS -- 100.0% $338,100,967 ============
NOTES TO THE SCHEDULE OF INVESTMENTS: - ------------------------------------------------------------------------------- 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. CPI - Consumer Price Index MBIA - Municipal Bond Insurance Association Variable and Step up rates - The rates shown on variable and step up rate notes are the current interest rates at February 29, 2000, which are subject to change based on the terms of the security, including varying reset dates. (a) All or a portion of this security has been segregated to cover collateral requirements on reverse repurchase agreements (Note 6). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). 4 See accompanying notes to the financial statements. GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $363,062,143) (Note 1) $363,173,917 Interest receivable 2,171,965 Receivable for open swap contracts (Notes 1 and 6) 276,837 Receivable for expenses waived or borne by Manager (Note 2) 28,995 ------------ Total assets 365,651,714 ------------ LIABILITIES: Payable for Fund shares repurchased 5,500,000 Interest payable for open swap contracts (Notes 1 and 6) 17,611 Payable for variation margin on open futures contracts (Notes 1 and 6) 970 Payable for reverse repurchase agreements (Notes 1 and 6) 21,769,437 Accrued expenses 262,729 ------------ Total liabilities 27,550,747 ------------ NET ASSETS $338,100,967 ============ NET ASSETS CONSIST OF: Paid-in capital $334,243,683 Accumulated undistributed net investment income 3,505,641 Accumulated net realized gain 194,512 Net unrealized appreciation 157,131 ------------ $338,100,967 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $338,100,967 ============ SHARES OUTSTANDING: Class III 13,367,318 ============ NET ASSET VALUE PER SHARE: Class III $ 25.29 ============
See accompanying notes to the financial statements. 5 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- PERIOD FROM DECEMBER 31, 1999 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $3,714,757 ---------- Total income 3,714,757 ---------- EXPENSES: Interest expense (Notes 1 and 6) 209,116 Audit fees 42,978 Custodian and transfer agent fees 9,975 Registration fees 1,026 Legal fees 741 Trustees fees (Note 2) 709 Miscellaneous 1,482 Fees waived or borne by Manager (Note 2) (56,911) ---------- Net expenses 209,116 ---------- Net investment income 3,505,641 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments 54,621 Closed futures contracts 139,891 ---------- Net realized gain 194,512 ---------- Change in net unrealized appreciation (depreciation) on: Investments 111,774 Open futures contracts (231,480) Open swap contracts 276,837 ---------- Net unrealized gain 157,131 ---------- Net realized and unrealized gain 351,643 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,857,284 ==========
6 See accompanying notes to the financial statements. GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD FROM DECEMBER 31, 1999 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 29, 2000 ----------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 3,505,641 Net realized gain 194,512 Change in net unrealized appreciation (depreciation) 157,131 ------------ Net increase in net assets from operations 3,857,284 ------------ Net share transactions: (Note 5) Class III 334,243,683 ------------ Increase in net assets resulting from net share transactions 334,243,683 ------------ Total increase in net assets 338,100,967 NET ASSETS: Beginning of period -- ------------ End of period (including accumulated undistributed net investment income of $3,505,641) $338,100,967 ============
See accompanying notes to the financial statements. 7 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM DECEMBER 31, 1999 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 29, 2000 ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 25.00 -------- Income from investment operations: Net investment income 0.26 Net realized and unrealized gain 0.03 -------- Total from investment operations 0.29 -------- Less distributions to shareholders: From net investment income -- From net realized gains -- -------- Total distributions -- -------- NET ASSET VALUE, END OF PERIOD $ 25.29 ======== TOTAL RETURN(a) 1.16%+ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $338,101 Net operating expenses to average daily net assets 0.00 % * Interest expense to average daily net assets 0.40%* Total net expenses to average daily net assets 0.40%*(c) Net investment income to average daily net assets 6.77%* Portfolio turnover rate 4% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: --(b)
(a) The total return would have been lower had certain expenses not been waived during the period shown. (b) Fees and expenses waived or borne by the Manager were less than $0.01 per share. (c) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. * Annualized. + Not annualized. 8 See accompanying notes to the financial statements. GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Alpha LIBOR Fund (the "Fund") , which commenced operations on December 31, 1999, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return by investing primarily in relatively high quality, low volatility fixed income instruments. The Fund's benchmark is the 3 month London Inter-Bank Offer Rate ("LIBOR") Index. Shares of Alpha Libor Fund are not available for direct purchase by investors, and are currently available only to other Funds of GMO Trust. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. 9 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market-makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. At February 29, 2000, the total value of these securities represented 34% of net assets. Included in this total are U.S. Government backed securities and other highly rated collateralized debt obligations that represent 33% of net assets at February 29, 2000. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FUTURES CONTRACTS The Fund may use futures contracts to manage its exposure to the bond and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and 10 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. There were no forward foreign currency contracts outstanding as of February 29, 2000. OPTIONS The Fund may write call and put options on securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 29, 2000 the Fund had no written option contracts outstanding. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's 11 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. The risk associated with purchasing put and call options is limited to the premium paid. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the lender) that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. Direct indebtedness of emerging countries involves a risk that the governmental entities responsible for the repayment of the debt may be unable or unwilling to pay the principal and interest when due. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements 12 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- involve commitments to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Credit default swaps involve the payment of a specified rate based on the notional amount. The Fund receives payment upon a default of the underlying security. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral, which is paid by the counterparty. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform and that there may be unfavorable changes in the fluctuation of interest rates. See Note 6 for a summary of open swap agreements as of February 29, 2000. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund has sold may decline below the contractual repurchase price under the agreement. At February 29, 2000, the Fund had entered into a 13 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- reverse repurchase agreement having a market value of $21,769,437, collateralized by a security with a market value of $22,118,196. See Note 6 for a summary of open reverse repurchase agreements as of February 29, 2000. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund had no securities on loan. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. Dividend income is recorded on the ex-dividend date. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in principal or face amount of these securities is recorded as interest income. 14 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .05% of the amount invested. The premium will be waived with respect to any portion of a purchase that is offset by a corresponding redemption occurring on the same day. In addition, the purchase premium for the Fund will be waived if the purchaser makes an in-kind purchase of Fund shares. All purchase premiums are paid to and recorded by the Fund as paid-in capital. For the period ended February 29, 2000, the Fund received $11,066 in purchase premiums. There is no premium for redemptions or reinvested distributions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO does not charge the Fund any management or service fees. In addition, GMO has contractually agreed to reimburse all of the Fund's expenses (excluding brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) until June 30, 2000. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the period ended February 29, 2000, was $709. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended February 29, 2000, aggregated $365,170,447 and $12,993,984, respectively. At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $363,062,143 $539,049 $(427,275) $111,774
15 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 100% of the outstanding shares of the Fund were held by other Funds of the GMO Trust. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from December 31, 1999 (commencement of operations) through February 29, 2000 ---------------------------------- Shares Amount Class III: ---------------- ---------------- Shares sold 13,962,351 $ 349,243,683 Shares issued to shareholders in reinvestment of distributions -- -- Shares repurchased (595,033) (15,000,000) ------------- ------------- Net increase 13,367,318 $ 334,243,683 ============= =============
The Fund was formed with a taxable contribution of securities in-kind, which had a market value of $327,112,459 on the date of contribution. 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- --------------------------------------------- --------------- ------------- -------------- Sales 158 U.S. Treasury Note 10 Yr. June 2000 $15,071,719 $ 31,067 348 U.S. Treasury Note 5 Yr. June 2000 33,788,625 (262,547) --------- $(231,480) =========
16 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- FUTURES CONTRACTS -- CONTINUED At February 29, 2000, the Fund has sufficient cash and/or securities to cover any commitments or margin on these contracts. REVERSE REPURCHASE AGREEMENT
Face Value Description Market Value ----------- ------------------------------------------------------- ------------ Barclays Bank, 6.09%, dated 1/5/00, to be repurchased at $22,108,243 on 4/6/00. $21,769,437 $21,769,437 ===========
Average balance outstanding $22,097,174 Average interest rate 6.06% Maximum balance outstanding $24,773,688 Average shares outstanding 13,234,554 Average balance per share outstanding $ 1.67
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund had entered into reverse repurchase agreements. SWAP AGREEMENTS
Notional Expiration Net Unrealized Amount Date Description Appreciation ----------- ---------- -------------------------------------------------- -------------- INTEREST RATE SWAPS $30,000,000 1/12/07 Agreement with UBS AG dated 1/10/00 to pay the $265,102 notional amount multiplied by 7.2175% and to receive the notional amount multiplied by 3 month LIBOR adjusted for a specific spread. 30,000,000 2/7/07 Agreement with Morgan Guaranty Trust Company dated 11,735 2/03/00 to receive the notional amount multiplied by 7.395% and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specific spread. -------- $276,837 ========
17 GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- The Fund has elected to defer to March 1, 2000 post October capital losses of $10,529. 18 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO U.S. CORE FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO U.S. Core Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- COMMON STOCKS -- 95.7% AEROSPACE -- 0.9% 269,600 Boeing Co 9,941,500 50,400 General Dynamics Corp 2,179,800 457,000 Lockheed Martin Corp 7,968,937 135,500 Northrop Grumman Corp 6,156,781 -------------- 26,247,018 -------------- AUTOMOTIVE -- 3.8% 435,100 Autonation Inc* 3,290,444 149,800 Dana Corp 3,192,612 94,900 Eaton Corp 7,111,569 736,500 Ford Motor Co 30,656,812 753,500 General Motors Corp 57,313,094 44,700 General Motors Corp, Class H* 5,386,350 110,300 Genuine Parts Co 2,488,644 319,900 Goodyear Tire & Rubber Co 7,257,731 -------------- 116,697,256 -------------- BANKING AND FINANCIAL SERVICES -- 12.1% 97,100 American Express Co 13,029,606 92,800 Amsouth Bancorp 1,345,600 1,006,009 Bank of America Corp 46,339,290 55,400 BB&T Corp 1,301,900 182,179 Bear Stearns Cos Inc 7,150,526 441,700 Chase Manhattan Corp 35,170,362 1,476,860 Citigroup Inc 76,335,201 185,100 Countrywide Credit Industries Inc 4,615,931 77,600 Donaldson Lufkin & Jenrette 3,370,750 422,500 Fannie Mae 22,392,500 19,000 Fifth Third Bancorp 989,187 494,300 Firstar Corp 8,804,719 114,000 Fleet Boston Financial Corp 3,106,500 218,200 Franklin Resources Inc 5,932,312 389,800 Freddie Mac 16,274,150 220,000 Golden West Financial Corp 6,270,000 88,600 Greenpoint Financial Corp 1,412,062 219,400 Household International Inc 7,007,087 155,500 J.P. Morgan & Co Inc 17,260,500 148,400 Lehman Brothers Holding Inc 10,759,000
See accompanying notes to the financial statements. 1 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- BANKING AND FINANCIAL SERVICES -- CONTINUED 3,000 M & T Bank Corp 1,107,000 630,900 MBNA Corp 14,352,975 322,300 Merrill Lynch 33,035,750 183,000 MGIC Investment Corp 6,839,625 157,800 Morgan Stanley Dean Witter & Co 11,115,037 35,700 Old Kent Financial Corp 934,894 171,700 Paine Webber Group Inc 6,567,525 60,800 Summit Bancorp 1,455,400 82,000 UnionBanCal Corp 2,634,250 82,000 Wells Fargo & Co 2,711,125 -------------- 369,620,764 -------------- CHEMICALS -- 1.3% 214,200 Air Products and Chemicals 5,515,650 70,400 Du Pont (E.I.) De Nemours 3,555,200 79,700 Eastman Chemical Co 2,864,219 89,500 PPG Industries Inc 4,419,062 200,900 Praxair Inc 6,780,375 86,241 Rohm & Haas Co 3,481,980 167,200 Sherwin Williams Co 3,197,700 201,000 Union Carbide Corp 10,791,187 -------------- 40,605,373 -------------- COMPUTER AND OFFICE EQUIPMENT -- 10.0% 562,300 Cisco Systems Inc* 74,329,031 145,800 Computer Associates International Inc 9,376,762 36,600 Electronic Data Systems Corp 2,369,850 147,200 Gateway Inc* 10,120,000 179,400 Hewlett Packard Co 24,129,300 249,900 IBM Corp 25,489,800 72,200 Micron Technology Inc* 7,080,112 2,050,800 Oracle Corp* 152,271,900 -------------- 305,166,755 -------------- CONSTRUCTION -- 0.5% 198,400 Georgia-Pacific Corp 6,882,000 121,150 Home Depot Inc 7,003,984 -------------- 13,885,984 --------------
See accompanying notes to the financial statements. 2 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- CONSUMER GOODS -- 1.2% 158,900 Eastman Kodak Co 9,106,956 127,100 Fortune Brands Inc 2,780,312 69,800 Johnson Controls 3,725,575 609,500 Mattel Co 5,866,437 137,600 Nike Inc, Class B 3,913,000 43,300 Procter and Gamble Co 3,810,400 68,300 Readers Digest Association Inc 2,347,812 120,500 VF Corp 2,974,844 67,600 Whirlpool Corp 3,671,525 -------------- 38,196,861 -------------- ELECTRONIC EQUIPMENT -- 10.3% 124,100 Analog Devices Inc* 19,483,700 267,700 Emerson Electric Co 12,197,081 223,600 General Electric Co 29,557,125 57,900 Jabil Circuit Inc* 4,020,431 62,300 Linear Technology Corp 6,537,606 321,000 LSI Logic Corp* 20,564,062 268,800 Motorola Inc 45,830,400 160,500 National Semiconductor Corp* 12,057,562 475,000 Nortel Networks Corp 52,962,500 259,000 Qualcomm Inc* 36,891,312 248,200 Raytheon Co, Class B 4,591,700 98,500 Tellabs Inc* 4,728,000 332,200 Texas Instruments Inc 55,311,300 140,900 Xilinx Inc* 11,236,775 -------------- 315,969,554 -------------- FOOD AND BEVERAGE -- 1.4% 110,200 Anheuser Busch Cos Inc 7,066,575 421,564 Archer Daniels Midland Co 4,241,988 33,200 Bestfoods 1,392,325 29,100 Heinz (HJ) Co 929,381 490,500 Nabisco Group Holdings 4,230,562 291,500 Seagrams Co Ltd 17,125,625 76,300 Sysco Corp 2,503,594 98,000 Tyson Food Inc, Class A 1,010,625 83,000 Wrigley (William Jr) Co 5,612,875 -------------- 44,113,550 --------------
See accompanying notes to the financial statements. 3 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- HEALTH CARE -- 2.5% 556,200 Columbia HCA Healthcare Corp 10,741,612 371,400 Johnson & Johnson 26,647,950 68,900 Pharmacia & Upjohn Inc 3,281,362 109,800 Stryker Corp 6,423,300 393,500 Tenet Healthcare Corp* 6,886,250 338,100 United Healthcare Corp 17,285,362 84,300 Wellpoint Health Network* 5,690,250 -------------- 76,956,086 -------------- INSURANCE -- 3.6% 167,200 Aetna Life and Casualty Co 6,876,100 67,400 Allmerica Financial Corp 2,813,950 715,800 Allstate Corp 13,958,100 78,200 AMBAC Inc 3,435,912 139,400 American General Corp 7,274,937 227,500 AXA Financial Inc 6,810,781 173,200 Chubb Corp 8,519,275 142,800 Cigna Corp 10,540,425 79,200 CNA Financial Corp* 2,138,400 421,836 Conseco Inc 6,169,351 250,800 Hartford Financial Services Group Inc 7,837,500 36,000 Jefferson Pilot Corp 1,874,250 147,000 Lincoln National Corp 4,088,437 135,800 Loews Corp 6,043,100 129,500 MBIA Inc 4,969,562 96,300 ReliaStar Financial Corp 2,690,381 249,300 Saint Paul Cos Inc 5,578,087 123,300 Torchmark Corp 2,442,881 123,900 Travelers Property Casualty Corp, Class A 3,918,337 243,000 Unumprovident Corp 3,250,125 -------------- 111,229,891 -------------- MACHINERY -- 1.9% 195,400 Applied Materials Inc* 35,745,987 192,000 Baker Hughes Inc 4,968,000 107,900 Caterpillar Inc 3,783,244 253,300 Deere and Co 9,055,475 45,400 Dover Corp 1,750,738
4 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- MACHINERY -- CONTINUED 92,000 Parker-Hannifin Corp 3,335,000 -------------- 58,638,444 -------------- MANUFACTURING -- 2.0% 166,100 Corning Inc 31,226,800 147,800 Leggett & Platt Inc 2,484,888 158,000 Minnesota Mining and Manufacturing Co 13,923,750 193,400 Owens Illinois Inc* 2,671,338 181,600 Rockwell International Corp 8,217,400 73,100 Temple Inland Inc 3,737,238 -------------- 62,261,414 -------------- METALS AND MINING -- 0.8% 204,600 Alcan Aluminum Ltd 6,751,800 209,700 Phelps Dodge Corp 9,882,113 98,800 Reynolds Metals Co 6,273,800 -------------- 22,907,713 -------------- OIL AND GAS -- 4.3% 107,000 Amerada Hess Corp 5,410,188 328,000 Atlantic Richfield Co 23,288,000 166,500 Burlington Resources Inc 4,599,563 112,600 Chevron Corp 8,409,813 116,250 Columbia Energy Group 6,858,750 297,900 Diamond Offshore Drilling Inc 9,458,325 510,505 Exxon Mobil Corp 38,447,408 43,800 Kerr-McGee Corp 1,960,050 292,600 Occidental Petroleum Corp 4,699,888 166,900 Phillips Petroleum Co 6,383,925 255,200 Texaco Inc 12,106,050 99,100 Unocal Corp 2,650,925 300,100 USX - Marathon Group 6,489,663 24,800 Vastar Resources Inc 1,315,950 -------------- 132,078,498 -------------- PAPER AND ALLIED PRODUCTS -- 1.1% 154,500 Champion International Corp 7,995,375 235,811 International Paper Co 8,680,792
See accompanying notes to the financial statements. 5 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- PAPER AND ALLIED PRODUCTS -- CONTINUED 96,000 Kimberly-Clark Corp 4,962,000 153,200 Mead Corp 4,586,425 101,200 Weyerhaeuser Co 5,192,825 101,500 Willamette Industries Inc 3,444,656 -------------- 34,862,073 -------------- PHARMACEUTICALS -- 3.5% 914,200 Abbott Laboratories 29,940,050 624,500 Amgen Inc* 42,583,094 349,100 Bristol Myers Squibb Co 19,833,244 80,900 Immunex Corp* 15,972,694 -------------- 108,329,082 -------------- PRIMARY MATERIALS -- 0.0% 84,500 Crown Cork & Seal Inc 1,183,000 -------------- PRIMARY PROCESSING -- 0.8% 146,600 Alcoa Inc 10,042,100 54,400 Dow Chemical Co 5,902,400 185,700 Nucor Corp 9,226,969 -------------- 25,171,469 -------------- PRINTING AND PUBLISHING -- 0.5% 52,400 Gannett Co Inc 3,415,825 90,900 Knight Ridder Inc 4,260,938 120,800 Tribune Co 4,703,650 2,800 Washington Post Co, Class B 1,365,700 -------------- 13,746,113 -------------- REFINING -- 1.2% 568,900 Royal Dutch Petroleum Co 29,867,250 204,700 Tosco Corp 5,475,725 -------------- 35,342,975 -------------- RETAIL TRADE -- 3.6% 648,952 Albertsons Inc 15,899,324 230,200 Autozone Inc* 5,654,288 121,800 Circuit City Stores Inc 4,917,675
6 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- RETAIL TRADE -- CONTINUED 276,100 Federated Department Stores Inc* 10,129,419 1,056,200 Kmart Corp* 9,307,763 242,900 May Department Stores Co 6,360,944 213,500 McDonald's Corp 6,738,594 206,100 Penney (JC) Co Inc 3,246,075 141,600 Safeway Inc* 5,460,450 553,700 Sears Roebuck & Co 15,261,356 119,100 Tandy Corp 4,533,244 112,700 Tiffany & Co 7,233,931 572,700 Toys R Us Inc* 7,087,163 156,800 Wal Mart Stores Inc 7,634,200 -------------- 109,464,426 -------------- SERVICES -- 1.0% 293,800 Cendant Corp* 5,233,313 41,000 FedEx Corp* 1,432,438 114,800 Fluor Corp 3,264,625 122,700 Marriott International Inc, Class A 3,381,919 301,600 The Walt Disney Co. 10,103,600 92,600 Time Warner Inc 7,917,300 -------------- 31,333,195 -------------- TECHNOLOGY -- 10.6% 539,600 BMC Software Inc* 24,821,600 182,300 First Data Corp 8,203,500 68,100 Grainger (WW) Inc 2,915,531 436,400 Honeywell International Inc 21,001,750 750,800 Intel Corp 84,840,400 112,600 JDS Uniphase Corp* 29,684,175 189,500 Microsoft Corp* 16,936,563 103,400 PE Corp - PE Biosystems Group 10,908,700 450,400 Seagate Technology Corp* 22,463,700 224,800 Solectron Corp* 14,724,400 704,400 Sun Microsystems Inc* 67,094,100 225,900 Teradyne Inc* 19,653,300 -------------- 323,247,719 -------------- TELECOMMUNICATIONS -- 10.1% 54,600 Alltel Corp 3,166,800
See accompanying notes to the financial statements. 7 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- TELECOMMUNICATIONS -- CONTINUED 2,117,882 AT & T Corp 104,702,791 157,700 AT & T Liberty Media Group* 8,239,825 399,414 Bell Atlantic Corp 19,546,323 346,700 Bellsouth Corp 14,128,025 198,800 CBS Corp* 11,841,025 486,600 GTE Corp 28,709,400 479,927 MCI Worldcom Inc* 21,416,742 102,600 MediaOne Group Inc* 8,054,100 108,300 Nextel Communications Inc, Class A* 14,810,025 832,366 SBC Communications Inc 31,629,908 198,400 Sprint Corp 12,102,400 58,900 Telephone and Data Systems Inc 6,213,950 43,300 United States Cellular Corp* 2,898,394 62,400 US West Inc 4,531,800 304,800 Viacom Inc, Class B* 16,992,600 -------------- 308,984,108 -------------- TOBACCO -- 1.0% 1,491,100 Philip Morris Cos Inc 29,915,194 -------------- TRANSPORTATION -- 1.8% 228,100 AMR Corp* 12,060,788 547,700 Burlington Northern Santa Fe Railroad Co 10,782,844 224,500 CSX Corp 4,981,094 139,800 Delta Air Lines Inc 6,378,375 257,800 Norfolk Southern Corp 3,496,413 177,900 UAL Corp* 8,672,625 235,700 Union Pacific Corp 8,956,600 -------------- 55,328,739 -------------- UTILITIES -- 3.9% 21,100 AES Corp* 1,768,444 86,400 Allegheny Energy Inc 2,241,000 146,900 Ameren Corp 4,407,000 92,000 American Electric Power Inc 2,587,500 304,800 Central & South West Corp 5,124,450 86,100 Cinergy Corp 1,840,388 185,000 Coastal Corp 7,781,563 60,300 Consolidated Edison Inc 1,662,019
8 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- UTILITIES -- CONTINUED 199,500 Constellation Energy Group Inc 5,935,125 151,800 Dominion Resources Inc 5,569,163 284,000 DTE Energy Co 8,573,250 130,700 Edison International 3,439,044 103,100 El Paso Energy Corp 3,821,144 542,400 Entergy Corp 10,983,600 217,400 Firstenergy Corp 4,062,663 27,200 Florida Progress Corp 1,159,400 68,700 FPL Group Inc 2,653,538 243,000 General Public Utilities Inc 6,044,625 98,400 Keyspan Corp 2,004,900 121,400 New Century Energies Inc 3,285,388 17,500 New England Electric System 945,000 145,500 Niagara Mohawk Holdings Inc* 1,709,625 81,300 Northern States Power Co 1,427,831 211,100 PG & E Corp 4,353,938 51,300 Pinnacle West Capital Corp 1,417,163 61,000 Potomac Electric Power Co 1,239,063 133,600 PPL Corp 2,688,700 242,000 Public Service Enterprise Group Inc 7,018,000 68,000 Reliant Energy Inc 1,398,250 28,700 Southern Co 636,781 54,600 Teco Energy Inc 982,800 316,000 Texas Utilities Co 10,309,500 43,900 Unicom Corp 1,659,969 -------------- 120,730,824 -------------- TOTAL COMMON STOCKS (COST $2,746,193,845) 2,932,214,078 -------------- SHORT-TERM INVESTMENTS -- 6.9% CASH EQUIVALENTS -- 2.7% $ 6,901,808 BankBoston Eurodollar Time Deposit, 6.1175%, due 4/28/00(a) 6,901,808 $ 6,258,549 First Union National Bank Time Deposit, 5.8125%, due 3/01/00(a) 6,258,549 $ 9,387,821 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(a) 9,387,821 20,648,872 Merrimac Cash Fund Premium Class(a) 20,648,872 $ 40,000,000 Prudential Securities Group, Inc. Master Note, 6.1875%, due 3/10/00(a) 40,000,000 -------------- 83,197,050 --------------
See accompanying notes to the financial statements. 9 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- U.S. GOVERNMENT -- 0.5% $ 14,500,000 U.S. Treasury Bill, 5.689%, due 6/29/00(b) 14,228,850 -------------- REPURCHASE AGREEMENT -- 3.7% $ 113,496,517 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/01/00, with a maturity value of $113,512,123, and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19, and a market value, including accrued interest, of $115,766,448. 113,496,517 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $210,929,667) 210,922,417 -------------- TOTAL INVESTMENTS -- 102.6% (Cost $2,957,123,512) 3,143,136,495 Other Assets and Liabilities (net) -- (2.6%) (80,901,116) -------------- TOTAL NET ASSETS -- 100.0% $3,062,235,379 ============== NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Represents investments of security lending collateral (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). 10 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $2,957,123,512) (Note 1) $3,143,136,495 Dividends and interest receivable 4,637,481 Receivable for variation margin on open futures contracts (Notes 1 and 6) 662,175 Receivable for expenses waived or borne by Manager (Note 2) 55,936 -------------- Total assets 3,148,492,087 -------------- LIABILITIES: Payable upon return of securities loaned (Note 1) 83,197,050 Payable for Fund shares repurchased 1,795,283 Payable to affiliate for (Note 2): Management fee 803,581 Shareholder service fee 321,841 Accrued expenses 138,953 -------------- Total liabilities 86,256,708 -------------- NET ASSETS $3,062,235,379 ============== NET ASSETS CONSIST OF: Paid-in capital $2,619,575,961 Accumulated undistributed net investment income 6,365,865 Accumulated net realized gain 250,852,685 Net unrealized appreciation 185,440,868 -------------- $3,062,235,379 ============== NET ASSETS ATTRIBUTABLE TO: Class II shares $ 95,041,041 ============== Class III shares $1,623,733,870 ============== Class IV shares $1,343,460,468 ============== SHARES OUTSTANDING: Class II 5,720,143 ============== Class III 97,625,347 ============== Class IV 80,829,331 ============== NET ASSET VALUE PER SHARE: Class II $ 16.62 ============== Class III $ 16.63 ============== Class IV $ 16.62 ==============
See accompanying notes to the financial statements. 11 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $118,939) $ 46,527,139 Interest (including securities lending income of $260,916) 12,649,511 ------------- Total income 59,176,650 ------------- EXPENSES: Management fee (Note 2) 11,161,595 Custodian and transfer agent fees 518,806 Legal fees 83,807 Audit fees 57,894 Trustees fees (Note 2) 39,227 Registration fees 5,540 Miscellaneous 33,333 Fees waived or borne by Manager (Note 2) (738,607) ------------- 11,161,595 Shareholder service fee (Note 2) Class II 179,753 Class III 2,541,507 Class IV 1,686,571 ------------- Net expenses 15,569,426 ------------- Net investment income 43,607,224 ------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 815,818,151 Closed futures contracts 11,693,846 Closed swap contracts (9,044,517) ------------- Net realized gain 818,467,480 ------------- Change in net unrealized appreciation (depreciation) on: Investments (431,036,228) Open futures contracts 784,766 Open swap contracts 4,358,815 ------------- Net unrealized loss (425,892,647) ------------- Net realized and unrealized gain 392,574,833 ------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 436,182,057 =============
12 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 43,607,224 $ 49,037,379 Net realized gain 818,467,480 624,236,822 Change in net unrealized appreciation (depreciation) (425,892,647) (170,678,257) -------------- -------------- Net increase in net assets from operations 436,182,057 502,595,944 -------------- -------------- Distributions to shareholders from: Net investment income Class II (1,009,817) (438,239) Class III (21,707,190) (32,457,119) Class IV (21,473,272) (20,082,410) -------------- -------------- Total distributions from net investment income (44,190,279) (52,977,768) -------------- -------------- Net realized gains Class II (19,476,292) (7,077,306) Class III (357,534,849) (420,933,348) Class IV (322,165,035) (249,579,720) -------------- -------------- Total distributions from net realized gains (699,176,176) (677,590,374) -------------- -------------- (743,366,455) (730,568,142) -------------- -------------- Net share transactions: (Note 5) Class II 64,741,476 27,619,700 Class III 1,301,568 (396,156,147) Class IV (61,972,966) 257,262,203 -------------- -------------- Increase (decrease) in net assets resulting from net share transactions 4,070,078 (111,274,244) -------------- -------------- Total decrease in net assets (303,114,320) (339,246,442) NET ASSETS: Beginning of period 3,365,349,699 3,704,596,141 -------------- -------------- End of period (including accumulated undistributed net investment income of $6,365,865 and $6,948,920, respectively) $3,062,235,379 $3,365,349,699 ============== ==============
See accompanying notes to the financial statements. 13 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS II SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ----------------------------------------------------------- 2000 1999 1998(1) 1997(2) 1997(3) ------- ------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 18.57 $ 19.98 $ 17.65 $ 20.10 $ 20.12 ------- ------- ------- ----------- ------- Income from investment operations: Net investment income 0.23+ 0.25+ 0.04+ 0.24+ 0.25 Net realized and unrealized gain 2.29 2.55 2.29 3.99 2.92 ------- ------- ------- ----------- ------- Total from investment operations 2.52 2.80 2.33 4.23 3.17 ------- ------- ------- ----------- ------- Less distributions to shareholders: From net investment income (0.24) (0.29) -- (0.22) (0.30) From net realized gains (4.23) (3.92) -- (3.90) (2.89) ------- ------- ------- ----------- ------- Total distributions (4.47) (4.21) 0.00 (4.12) (3.19) ------- ------- ------- ----------- ------- NET ASSET VALUE, END OF PERIOD $ 16.62 $ 18.57 $ 19.98 $ 20.21 $ 20.10 ======= ======= ======= =========== ======= TOTAL RETURN(a) 13.61% 14.99% 13.20%++ 23.00%++ 17.46%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $95,041 $41,684 $16,958 $ 2,037 $64,763 Net expenses to average daily net assets 0.55% 0.55% 0.55%* 0.55%* 0.55%* Net investment income to average daily net assets 1.21% 1.29% 1.53%* 1.66%* 1.63%* Portfolio turnover rate 90% 71% 60% 60% 107% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: --(b) $ 0.04 $ 0.01 $ 0.03 $ 0.03
(1) Period from January 9, 1998 to February 28, 1998. (2) Period from March 1, 1997 to November 17, 1997. (3) Period from June 7, 1996 (commencement of operations) to February 28, 1997. (a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Fees and expenses waived or borne by the Manager were less than $0.01 per share. + Computed using average shares outstanding throughout the period. ++ Not annualized. * Annualized. 14 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ---------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 18.59 $ 19.99 $ 20.12 $ 19.46 $ 15.45 ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.24+ 0.26+ 0.35 0.36 0.41 Net realized and unrealized gain 2.28 2.55 5.89 3.58 5.49 ---------- ---------- ---------- ---------- ---------- Total from investment operations 2.52 2.81 6.24 3.94 5.90 ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.25) (0.29) (0.32) (0.39) (0.42) From net realized gains (4.23) (3.92) (6.05) (2.89) (1.47) ---------- ---------- ---------- ---------- ---------- Total distributions (4.48) (4.21) (6.37) (3.28) (1.89) ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 16.63 $ 18.59 $ 19.99 $ 20.12 $ 19.46 ========== ========== ========== ========== ========== TOTAL RETURN(a) 13.66% 15.02% 36.69% 22.05% 39.08% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $1,623,734 $1,780,011 $2,317,103 $3,051,344 $3,179,314 Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48% 0.48% Net investment income to average daily net assets 1.27% 1.36% 1.67% 1.78% 2.25% Portfolio turnover rate 90% 71% 60% 107% 77% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: --(b) $ 0.04 $ 0.05 $ 0.04 $ 0.01
(a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Fees and expenses waived or borne by the Manager were less than $0.01 per share. + Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 15 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ---------------------------------- 2000 1999 1998* ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 18.58 $ 19.99 $ 17.65 ---------- ---------- ---------- Income from investment operations: Net investment income 0.25+ 0.27+ 0.04+ Net realized and unrealized gain 2.28 2.55 2.30 ---------- ---------- ---------- Total from investment operations 2.53 2.82 2.34 ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.26) (0.31) -- From net realized gains (4.23) (3.92) -- ---------- ---------- ---------- Total distributions (4.49) (4.23) 0.00 ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 16.62 $ 18.58 $ 19.99 ========== ========== ========== TOTAL RETURN(a) 13.74% 15.07% 13.26%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $1,343,460 $1,543,655 $1,370,535 Net expenses to average daily net assets 0.44% 0.44% 0.44%** Net investment income to average daily net assets 1.32% 1.41% 1.67%** Portfolio turnover rate 90% 71% 60% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: --(b) $ 0.04 $ 0.01
(a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Fees and expenses waived or borne by the Manager were less than $0.01 per share. * Period from January 9, 1998 (commencement of operations) to February 28, 1998. ** Annualized. + Computed using average shares outstanding throughout the period. ++ Not annualized. 16 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO U.S. Core Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in U.S. equity securities. The Fund's benchmark is the S&P 500 index. The Fund offers three classes of shares: Class II, Class III, and Class IV. The principal economic difference between the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully outlined in the Trust's prospectus. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying 17 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund loaned securities having a market value of $80,787,867, collateralized by cash in the amount of $83,197,050, which was invested in short-term instruments. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund enters into equity swap agreements which involve a commitment by 18 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The Fund also enters into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 29, 2000 the Fund had no open swap agreements. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. The Fund declares separate dividends from net investment income on each class of shares. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to redemptions in-kind. Gains resulting from such in-kind transactions amounted to $52,390,734. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This 19 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $ -- $(86,138,001) $86,138,001
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .14% of the amount invested. All purchase premiums are paid to and recorded by the Fund as paid-in capital. This fee is allocated relative to each class' net assets on the share transaction date. For the year ended February 29, 2000, the Fund received $413,339 in purchase premiums. There is no premium for cash redemptions, reinvested distributions or in-kind transactions. Effective April 7, 2000, the Fund will no longer charge a purchase premium. 20 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .22% for Class II shares, .15% for Class III shares, and .105% for Class IV shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .525% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeded .33% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $39,227. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $2,772,912,220 and $3,342,904,994, respectively. At February 29, 2000, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $2,969,416,324 $537,760,565 $(364,040,394) $173,720,171
4. PRINCIPAL SHAREHOLDER At February 29, 2000, 14.9% of the outstanding shares of the Fund were held by one shareholder. 21 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 -------------------------- -------------------------- Shares Amount Shares Amount Class II: ----------- ------------- ----------- ------------- Shares sold 3,985,880 $ 74,957,732 1,137,984 $ 23,036,514 Shares issued to shareholders in reinvestment of distributions 1,158,453 20,008,247 394,655 7,372,964 Shares repurchased (1,668,281) (30,224,503) (137,205) (2,789,778) ----------- ------------- ----------- ------------- Net increase 3,476,052 $ 64,741,476 1,395,434 $ 27,619,700 =========== ============= =========== ============= Year Ended Year Ended February 29, 2000 February 28, 1999 -------------------------- -------------------------- Shares Amount Shares Amount Class III: ----------- ------------- ----------- ------------- Shares sold 11,331,748 $ 215,996,626 7,724,323 $ 155,828,896 Shares issued to shareholders in reinvestment of distributions 21,061,629 368,034,755 23,463,193 440,891,297 Shares repurchased (30,533,541) (582,729,813) (51,356,934) (992,876,340) ----------- ------------- ----------- ------------- Net increase (decrease) 1,859,836 $ 1,301,568 (20,169,418) $(396,156,147) =========== ============= =========== ============= Year Ended Year Ended February 29, 2000 February 28, 1999 -------------------------- -------------------------- Shares Amount Shares Amount Class IV: ----------- ------------- ----------- ------------- Shares sold 3,955,702 $ 79,266,480 22,393,827 $ 428,114,213 Shares issued to shareholders in reinvestment of distributions 19,531,086 342,781,629 14,303,391 268,384,348 Shares repurchased (25,740,318) (484,021,075) (22,187,638) (439,236,358) ----------- ------------- ----------- ------------- Net increase (decrease) (2,253,530) $ (61,972,966) 14,509,580 $ 257,262,203 =========== ============= =========== =============
22 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FUTURES CONTRACTS
Number of Contract Contracts Type Expiration Date Value --------- --------------------------------------------- --------------------------------------------- ------------- Buys 109 S&P 500 March 2000 $37,387,000 Number of Net Unrealized Contracts Depreciation --------- -------------- Buys 109 $(572,115) =========
At February 29, 2000 the Fund has sufficient cash and/or securities to cover any commitments or margin on open futures contracts. 23 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all of the Funds distributions are from investment company taxable income, except that the Fund has designated 79.11% of the distributions as net capital gain dividends. 24 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are primarily responsible for the day-to-day management of the Fund's portfolio. Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO U.S. Core Fund returned 13.7% for the fiscal year ended February 29, 2000, as compared to 11.7% for the S&P 500. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in common stocks throughout the period. For the fiscal year, narrow market conditions persisted despite a brief broadening in the market in the second quarter. U.S. market returns were dominated by technology and telecommunications stocks. Growth stocks across all market capitalization bands outperformed value stocks. Sector selection detracted modestly from performance. The Fund's underweight in consumer staple (particularly food and beverage) stocks added 130 basis points as these stocks underperformed the benchmark by 35% for the fiscal year. The underweight positions in financial services and health care stocks, also poor performers, added modestly to performance. However, these positive contributions were offset by an overweight position in value stocks, including auto/transportation stocks and electric utilities. These positions detracted - -200 basis points in aggregate from performance. The Fund's underweight in the largest stocks also hurt performance as these stocks dominated the market for most of the fiscal year. The Fund's outperformance relative to the benchmark for the fiscal year was attributable to strong stock selection. Selection was particularly strong in technology, pharmaceutical and producer durable stocks. Weak selection among telephone utility, financial services, consumer staple and consumer discretionary stocks detracted from performance. The MOMENTUM stock selection strategy performed well. The INTRINSIC VALUE strategy was neutral relative to the benchmark, while the NEGLECT, BOOK VALUE and CASH FLOW strategies underperformed. OUTLOOK The portfolio is conservatively positioned, with a lower price-to-book, lower price-to-earnings and a higher dividend yield than the S&P 500. In our view, value stocks are significantly undervalued compared to growth stocks. The spread of value stocks relative to growth stocks is at its widest level since the early 1970's. The Fund is overweight in both auto/transportation stocks and electric utilities, reflecting our preference for value stocks. We are gradually reducing our exposure to technology stocks. While earlier in 1999 many of these stocks were attractive to our intrinsic value methodology, most technology stocks have now appreciated to a point where they are now expensive on this measure. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO U.S. CORE FUND CLASS III SHARES AND THE S&P 500 INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Class III Inception 9/18/85 1yr 5yr 10yr 13.5 24.78 18.35 Class II Inception 6/07/96* 1yr 5yr 10yr (ITD) 13.46 N/A 21.88 Class IV Inception 1/09/98 1yr 5yr 10yr (ITD) 13.58 N/A 20.11
[GRAPH]
Date GMO U.S. Core Fund-III S&P 500 2/28/90 9986 10000 3/31/90 10162 10265 6/30/90 10780 10909 9/30/90 9322 9410 12/31/90 10242 10253 3/31/91 11888 11742 6/30/91 11703 11716 9/30/91 12286 12343 12/31/91 13304 13377 3/31/92 12947 13041 6/30/92 13347 13289 9/30/92 13559 13709 12/31/92 14093 14400 3/31/93 15004 15029 6/30/93 15340 15102 9/30/93 16106 15491 12/31/93 16388 15851 3/31/94 15884 15249 6/30/94 15916 15313 9/30/94 16599 16062 12/31/94 16775 16060 3/31/95 18308 17623 6/30/95 20312 19306 9/30/95 22516 20840 12/31/95 24031 22094 3/31/96 24896 23280 6/30/96 25731 24325 9/30/96 26448 25077 12/31/96 28263 27167 3/31/97 28954 27896 6/30/97 33658 32766 9/30/97 37609 35220 12/31/97 38183 36231 3/31/98 43183 41284 6/30/98 44071 42647 9/30/98 39843 38405 12/31/98 47610 46584 3/31/99 49348 48905 6/30/99 53033 52353 9/30/99 49410 49083 12/31/99 56463 56385 2/29/00 53995 52538
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 14 bp on the purchase. Transaction fees are retained by the Fund to cover trading costs. Performance for Class IV and Class II shares may vary due to different shareholder service fees. Past performance is not indicative of future performance. Information is unaudited. * Class II performance includes Class III performance for the period November 17, 1997 to January 9, 1998, during which no Class II shares were outstanding. GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Domestic Bond Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ DEBT OBLIGATIONS -- 95.3% ASSET BACKED SECURITIES -- 28.2% 10,000,000 Augusta Funding Ltd. X, 144A, Variable Rate, 3mo. LIBOR + .25%, 6.43%, due 06/30/17 9,692,187 400,279 Constellation Series 99-1A, 144A, 5.73%, due 04/18/02 400,029 2,792,308 Great Point CBO Ltd. Series 98-1A Class A1, 144A, Variable Rate, 6 mo. LIBOR + .30%, 6.39%, due 10/15/10 2,773,983 4,492,655 Northstar CBO Ltd. Series 97-2 Class A2, 144A, Variable Rate, Step Up, 6.62%, due 07/15/09 4,169,043 17,000,000 NPF XII, Inc. Series 99-2 Class A, 144A, 7.05%, due 06/01/03(a) 16,787,500 5,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A, Variable Rate, Step Up, 6.33%, due 09/15/09 4,921,875 4,932,000 SMS Student Loan Trust 95-A Certificates, Variable Rate, 1 mo. LIBOR + .65%, 6.46%, due 04/25/25 4,919,670 2,637,000 SMS Student Loan Trust Series 94-B Certificates, Variable Rate, 1 mo. LIBOR + .75%, 6.56%, due 10/25/23 2,641,747 8,000 Society Student Loan Trust Series 93-A Class B, Variable Rate, 1 mo. LIBOR + .75%, 6.56%, due 07/25/03 8,000 ------------ 46,314,034 ------------ CORPORATE DEBT -- 1.1% 1,000,000 Banco Santander, Series MBIA, 6.50%, due 11/01/05 933,500 1,000,000 Pemex Finance Ltd. Series 1A1 Class A2, 144A, 6.30%, due 05/15/10 892,000 ------------ 1,825,500 ------------ FOREIGN GOVERNMENT OBLIGATIONS -- 5.3% 25,000,000 Bulgaria Discount Strips, 0.00%, due 07/28/24(b) 4,913,062 20,000,000 Republic of Ecuador Discount Bond Series A Receipts, Zero Coupon, due 02/28/25(b) 3,836,938 ------------ 8,750,000 ------------ U.S. GOVERNMENT -- 0.3% 513,110 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09(c) 496,755 ------------ U.S. GOVERNMENT AGENCY -- 60.4% 10,000,000 Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10%, 6.15%, due 02/01/27 9,800,000 7,500,000 Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. LIBOR + .30%, 6.65%, due 12/01/14 7,443,750
See accompanying notes to the financial statements. 1 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ U.S. GOVERNMENT AGENCY -- CONTINUED 6,131,451 Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. U.S. Treasury Bill + .75%, 6.77%, due 03/30/19 6,085,465 20,000,000 Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. LIBOR - .015%, 6.34%, due 02/01/25 19,200,000 15,000,000 Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. LIBOR + .15%, 6.51%, due 10/29/26 14,737,500 25,000,000 Agency for International Development Floater (Support of Portugal), Variable Rate, 6 mo. LIBOR, 6.35%, due 01/01/21 24,968,750 8,687,500 Agency for International Development Floater (Support of Sri Lanka), Variable Rate, 6 mo. LIBOR + .20%, 6.55%, due 06/15/12 8,622,344 8,800,002 Agency for International Development Floater (Support of Zimbabwe), Variable Rate, 3 mo. U.S. Treasury Bill X 115%, 5.83%, due 01/01/12 8,448,002 ------------ 99,305,811 ------------ TOTAL DEBT OBLIGATIONS (COST $158,911,897) 156,692,100 ------------ PRINCIPAL AMOUNT - ------------- CALL OPTIONS PURCHASED -- 0.0% OPTIONS ON FUTURES -- 0.0% 530,000 Eurodollar, Expires 3/13/00, Strike 93.75 29,150 ------------ TOTAL CALL OPTIONS PURCHASED (COST $20,520) 29,150 ------------ SHARES - ------------- PREFERRED STOCKS -- 4.9% BANKING AND FINANCIAL SERVICES -- 4.9% 10,000 Home Ownership Funding 2 Preferred 144A, 13.338% 8,009,120 ------------ TOTAL PREFERRED STOCKS (COST $9,296,160) 8,009,120 ------------
See accompanying notes to the financial statements. 2 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SHORT-TERM INVESTMENTS -- 1.2% COMMERCIAL PAPER -- 1.1% 1,800,000 Koch Industries Inc., 5.83%, due 3/01/00 1,800,000 ------------ REPURCHASE AGREEMENT -- 0.1% 222,352 Salomon Smith Barney, Inc. Repurchase Agreement, dated 2/29/00, due 3/01/00, with a maturity value of $222,383, and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19, and a market value, including accrued interest, of $226,799. 222,352 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $2,022,352) 2,022,352 ------------ TOTAL INVESTMENTS -- 101.4% (Cost $170,250,929) 166,752,722 Other Assets and Liabilities (net) -- (1.4%) (2,295,491) ------------ TOTAL NET ASSETS -- 100.0% $164,457,231 ============
NOTES TO THE SCHEDULE OF INVESTMENTS: - ------------------------------------------------------------------------------- 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. Variable and Step up rates - The rates shown on variable and step up rate notes are the current interest rates at February 29, 2000, which are subject to change based on the terms of the security, including varying reset dates. (a) All or a portion of this security has been segregated to cover collateral requirements on reverse repurchase agreements (Note 6). (b) Valued by management (Note 1). (c) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). See accompanying notes to the financial statements. 3 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $170,250,929) (Note 1) $166,752,722 Interest receivable 1,612,182 Receivable for variation margin on open futures contracts (Notes 1 and 6) 8,405 Receivable for open swap contracts (Notes 1 and 6) 1,121,100 Receivable for expenses waived or borne by Manager (Note 2) 7,452 ------------ Total assets 169,501,861 ------------ LIABILITIES: Payable for Fund shares repurchased 164,050 Payable to affiliate for (Note 2): Management fee 13,563 Shareholder service fee 20,208 Payable for reverse repurchase agreements (Notes 1 and 6) 4,798,000 Accrued expenses 48,809 ------------ Total liabilities 5,044,630 ------------ NET ASSETS $164,457,231 ============ NET ASSETS CONSIST OF: Paid-in capital $172,021,639 Accumulated undistributed net investment income 895,261 Accumulated net realized loss (5,912,734) Net unrealized depreciation (2,546,935) ------------ $164,457,231 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $164,457,231 ============ SHARES OUTSTANDING: Class III 17,825,718 ============ NET ASSET VALUE PER SHARE: Class III $ 9.23 ============
4 See accompanying notes to the financial statements. GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest (including securities lending income of $982) $9,773,691 Dividends 953,630 ---------- Total income 10,727,321 ---------- EXPENSES: Management fee (Note 2) 170,540 Interest expense (Notes 1 and 6) 323,186 Audit fees 37,439 Custodian and transfer agent fees 32,068 Legal fees 3,498 Registration fees 2,868 Trustees fees (Note 2) 1,781 Miscellaneous 2,379 Fees waived or borne by Manager (Note 2) (80,033) ---------- 493,726 Shareholder service fee (Note 2) Class III 255,809 ---------- Net expenses 749,535 ---------- Net investment income 9,977,786 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (861,157) Closed futures contracts 1,864,515 Closed swap contracts (1,515,001) ---------- Net realized loss (511,643) ---------- Change in net unrealized appreciation (depreciation) on: Investments (1,847,558) Open futures contracts (541,642) Open swap contracts (3,908,178) ---------- Net unrealized loss (6,297,378) ---------- Net realized and unrealized loss (6,809,021) ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,168,765 ==========
See accompanying notes to the financial statements. 5 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 9,977,786 $ 16,849,450 Net realized gain (loss) (511,643) 1,274,151 Change in net unrealized appreciation (depreciation) (6,297,378) (2,987,171) ------------ -------------- Net increase in net assets from operations 3,168,765 15,136,430 ------------ -------------- Distributions to shareholders from: Net investment income Class III (10,394,028) (18,501,522) ------------ -------------- Total distributions from net investment income (10,394,028) (18,501,522) ------------ -------------- Net realized gains Class III (318,238) (4,552,278) ------------ -------------- Total distributions from net realized gains (318,238) (4,552,278) ------------ -------------- In excess of net realized gains Class III (8,745) (5,488,875) ------------ -------------- Total distributions in excess of net realized gains (8,745) (5,488,875) ------------ -------------- (10,721,011) (28,542,675) ------------ -------------- Net share transactions: (Note 5) Class III (3,061,193) (242,933,466) ------------ -------------- Decrease in net assets resulting from net share transactions (3,061,193) (242,933,466) ------------ -------------- Total decrease in net assets (10,613,439) (256,339,711) NET ASSETS: Beginning of period 175,070,670 431,410,381 ------------ -------------- End of period (including accumulated undistributed net investment income of $895,261 and $1,320,248, respectively) $164,457,231 $ 175,070,670 ============ ==============
6 See accompanying notes to the financial statements. GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.65 $ 10.26 $ 10.18 $ 10.40 $ 10.13 -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.60 0.68 0.67 0.58 0.66 Net realized and unrealized gain (loss) (0.42) (0.15) 0.38 (0.09) 0.58 -------- -------- -------- -------- -------- Total from investment operations 0.18 0.53 1.05 0.49 1.24 -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.58) (0.68) (0.70) (0.60) (0.60) From net realized gains (0.02) (0.21) (0.27) (0.08) (0.37) In excess of net realized gains --(c) (0.25) -- (0.03) -- -------- -------- -------- -------- -------- Total distributions (0.60) (1.14) (0.97) (0.71) (0.97) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.23 $ 9.65 $ 10.26 $ 10.18 $ 10.40 ======== ======== ======== ======== ======== TOTAL RETURN(a) 2.03% 5.03% 10.71% 4.93% 12.50% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $164,457 $175,071 $431,410 $570,862 $310,949 Net operating expenses to average daily net assets 0.25% 0.25% 0.25% 0.25% 0.25% Interest expense to average daily net assets 0.19% 0.02% -- -- -- Total net expenses to average daily net assets 0.44%(d) 0.27%(d) 0.25% 0.25% 0.25% Net investment income to average daily net assets 5.85% 6.21% 6.14% 6.15% 6.52% Portfolio turnover rate 20% 17% 59% 25% 70% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: --(b) $ 0.02 $ 0.02 $ 0.02 $ 0.01
(a) The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Fees and expenses waived or borne by the Manager were less than $0.01 per share. (c) The per share distribution in excess of net realized gains was less than $0.001. (d) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. See accompanying notes to the financial statements. 7 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Domestic Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in U.S. investment grade securities. The Fund's benchmark is the Lehman Brothers Government Bond Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market-makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. 8 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Certain securities held by the Fund were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. At February 29, 2000, the total value of these securities represented 79% of net assets. Included in this total are U.S. Government backed securities and highly rated collateralized debt obligations that represent 78% of net assets at February 29, 2000. FUTURES CONTRACTS The Fund may use futures contracts to manage its exposure to the bond markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. OPTIONS The Fund may write call and put options on futures or securities it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the future or security transaction to determine the realized gain or loss. If a written put option is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund as a writer of an option has no control over whether the underlying future or security may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price 9 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- of the security underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 29, 2000, the Fund had no written option contracts outstanding. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future or security transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the lender) that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. Direct indebtedness of emerging countries involves a risk that the governmental entities responsible for the repayment of the debt may be unable or unwilling to pay the principal and interest when due. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterpartys custodian in a segregated account for the benefit of the Fund and the counterparty. 10 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations equal in value to its obligations in the name of the counterparty in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund was sold may decline below the contractual repurchase price under the agreement. At February 29, 2000, the Fund had entered into reverse repurchase agreements having a market value of $4,798,000, collateralized by securities with a market value of $4,937,500. See Note 6 for a summary of open reverse repurchase agreements as of February 29, 2000 INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SECURITY LENDING The Fund may lend its securities to qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, there were no securities on loan. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate and total return swap agreements to manage its exposure to interest rates. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay 11 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform and that there may be unfavorable changes in the fluctuation of interest rates. See Note 6 for a summary of the open swap agreement as of February 29, 2000. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to the classification of distributions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable 12 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $(8,745) $8,745 $--
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. Dividend income is recorded on the ex-dividend date. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .10% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. 13 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Prior to March 1, 1999, GMO earned a management fee at the annual rate of .25% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeded .10% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000, was $1,781. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES For the year ended February 29, 2000, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Sales ----------- ----------- U.S. Government securities $ 1,002,341 $ 1,004,246 Investments (non-U.S. Government securities) 33,598,875 40,285,306
At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $170,250,929 $1,062,159 $(4,560,366) $(3,498,207)
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 39.0% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Funds outstanding shares. 14 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ------------------------ -------------------------- Shares Amount Shares Amount Class III: ---------- ------------ ----------- ------------- Shares sold 2,481,680 $ 23,173,404 7,444,098 $ 76,654,884 Shares issued to shareholders in reinvestment of distributions 870,554 8,051,201 2,308,399 23,190,329 Shares repurchased (3,677,351) (34,285,798) (33,636,371) (342,778,679) ---------- ------------ ----------- ------------- Net decrease (325,117) $ (3,061,193) (23,883,874) $(242,933,466) ========== ============ =========== =============
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FUTURES CONTRACTS
Number of Expiration Contract Contracts Type Date Value --------- --------------------------------------------- --------------------------------------------- ------------ Sales 1 U.S. Long Bond June 2000 $ 94,687 16 U.S. Treasury Note 10 Yr. June 2000 1,526,250 230 U.S. Treasury Note 5 Yr. June 2000 22,331,563 Net Unrealized Number of Appreciation Contracts (Depreciation) --------- -------------- Sales 1 $ 549 16 3,146 230 (173,523) --------- $(169,828) =========
At February 29, 2000 the Fund has sufficient cash and/or securities to cover any commitments or margin on open futures contracts. 15 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- REVERSE REPURCHASE AGREEMENTS
Face Value Description Market Value ---------- ------------------------------------------------------- ------------ Bear Stearns, 6.19%, dated 2/16/00, to be repurchased $4,798,000 on demand at face value plus accrued interest. $4,798,000 ==========
Average balance outstanding $10,582,224 Average interest rate 5.32% Maximum balance outstanding $18,242,000 Average shares outstanding 18,049,854 Average balance per share outstanding $ .59
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund had entered into reverse repurchase agreements. TOTAL RETURN SWAP AGREEMENTS
Notional Expiration Net Unrealized Amount Date Description Appreciation ------------ ---------- -------------------------------------------------- -------------- $ 25,000,000 11/12/00 Agreement with Morgan Guaranty Trust Company dated $ 226,331 11/09/98 to receive (pay) the notional amount multiplied by the return on the Lehman Aggregate Index and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. + 100,000,000 6/01/01 Agreement with Lehman Brothers Special Financing 894,769 Inc. dated 5/20/99 to receive (pay) the notional amount multiplied by the return on the Lehman Brothers U.S. Government Bond Index and to pay the notional amount multiplied by 1 month LIBOR adjusted by a specified spread. + ---------- $1,121,100 ==========
+ This swap agreement is valued by management (Note 1). 16 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 3% of the distributions as net capital gain dividends. The fund has elected to defer to March 1, 2000 post October capital losses of $1,617,004. At February 29, 2000 the Fund had a capital loss carryforward available to offset future capital gains, if any, of the following amount:
Year of Expiration Amount ------------------ ---------- 2008 $3,335,828
17 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Domestic Bond Fund returned 2.0% for the fiscal year ended February 29, 2000, as compared with the 1.1% return of the Lehman Brothers Government Bond Index. Consistent with the Fund's investment objectives and policies, the Fund was substantially invested in high-quality, domestic fixed income instruments throughout the period. The Fund outperformed the benchmark during the fiscal year by 0.9%. While spreads relative to U.S. Treasuries declined during the period, they remained high relative to historical levels. The Fund benefited from capital gains and from wider spreads. At fiscal year end, approximately 28% of the Fund was invested in highly-rated, floating rate, asset-backed securities. These included issues backed by auto, truck, credit card and health care receivables. Also, approximately 65% of the Fund was invested in U.S. government agency issues that offer higher yields than similar maturity U.S. Treasury securities. The remainder of the Fund was split between U.S. Treasuries (less than 1%), corporates (1%), and foreign governments bonds (5%). Although spreads relative to U.S. Treasuries declined during the fiscal year, they remain high relative to historical levels. Yield to maturity for the Fund is currently about 80 basis points higher than the benchmark. The Fund's duration is designed to match the benchmark. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO DOMESTIC BOND FUND CLASS III SHARES AND THE LEHMAN BROTHERS GOVERNMENT BOND INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 8/18/94 1yr 5yr 10yr (ITD) 2.03 6.96 6.87
[GRAPH]
Date GMO Domestic Bond Fund-III Lehman Brothers Government Bond 8/18/94 10000 10000 9/30/94 9890 9927 12/31/94 9939 9962 3/31/95 10377 10431 6/30/95 11036 11078 9/30/95 11272 11275 12/31/95 11785 11790 3/31/96 11506 11523 6/30/96 11560 11578 9/30/96 11785 11773 12/31/96 12143 12116 3/31/97 12035 12018 6/30/97 12472 12435 9/30/97 12876 12852 12/31/97 13352 13278 3/31/98 13510 13478 6/30/98 13899 13834 9/30/98 14662 14599 12/31/98 14427 14586 3/31/99 14192 14378 6/30/99 14190 14255 9/30/99 14185 14350 12/31/99 14168 14260 2/29/00 14450 14484
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period. Past performance is not indicative of future performance. Information is unaudited. GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Global Balanced Allocation Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trusts management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MUTUAL FUNDS -- 100.0% 524,691 GMO Currency Hedged International Core Fund 5,267,894 1,797,460 GMO Domestic Bond Fund 16,590,559 454,260 GMO Emerging Country Debt Fund 3,970,230 503,426 GMO Emerging Markets Fund 5,618,234 508,367 GMO Evolving Countries Fund 5,800,465 58,404 GMO Growth Fund 289,102 579,490 GMO Inflation Indexed Bond Fund 5,632,642 299,661 GMO International Bond Fund 2,753,884 413,569 GMO International Core Fund 8,647,732 76,310 GMO International Small Companies Fund 880,622 806,422 GMO REIT Fund 6,661,050 224,860 GMO Small Cap Growth Fund 3,793,380 498,732 GMO Small Cap Value Fund 6,189,265 2,810,603 GMO U.S. Bond/Global Alpha A Fund 27,094,212 1,059,749 GMO U.S. Core Fund 17,623,622 283,950 GMO Value Fund 2,265,923 ------------- TOTAL MUTUAL FUNDS (COST $126,875,338) 119,078,816 ------------- SHORT-TERM INVESTMENTS -- 0.0% REPURCHASE AGREEMENT -- 0.0% $ 7,286 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/01/00, with a maturity value of $7,287, and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19, and a market value, including accrued interest, of $7,432. 7,286 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $7,286) 7,286 ------------- TOTAL INVESTMENTS -- 100.0% (Cost $126,882,624) 119,086,102 Other Assets and Liabilities (net) -- (0.0%) (11,513) ------------- TOTAL NET ASSETS -- 100.0% $ 119,074,589 =============
See accompanying notes to the financial statements. 1 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $126,882,624) (Note 1) $119,086,102 Receivable for expenses waived or borne by Manager (Note 2) 4,961 ------------ Total assets 119,091,063 ------------ LIABILITIES: Accrued expenses 16,474 ------------ Total liabilities 16,474 ------------ NET ASSETS $119,074,589 ============ NET ASSETS CONSIST OF: Paid-in capital $127,127,984 Accumulated undistributed net investment income 1,382,361 Accumulated net realized loss (1,639,234) Net unrealized depreciation (7,796,522) ------------ $119,074,589 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $119,074,589 ============ SHARES OUTSTANDING: Class III 11,050,953 ============ NET ASSET VALUE PER SHARE: Class III $ 10.78 ============
2 See accompanying notes to the financial statements. GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 4,884,402 Interest 3,606 ----------- Total income 4,888,008 ----------- EXPENSES: Audit fees 17,556 Custodian and transfer agent fees 18,292 Legal fees 3,021 Registration fees 2,136 Trustees fees (Note 2) 1,315 Miscellaneous 1,646 Fees waived or borne by Manager (Note 2) (43,966) ----------- Net expenses -- ----------- Net investment income 4,888,008 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (5,563,922) Realized gain distributions from investment company shares 5,502,787 ----------- Net realized loss (61,135) ----------- Change in net unrealized appreciation (depreciation) on investments 10,164,723 ----------- Net realized and unrealized gain 10,103,588 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $14,991,596 ===========
See accompanying notes to the financial statements. 3 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 4,888,008 $ 3,054,707 Net realized gain (loss) (61,135) 11,000,413 Change in net unrealized appreciation (depreciation) 10,164,723 (17,495,459) ------------ ------------ Net increase (decrease) in net assets from operations 14,991,596 (3,440,339) ------------ ------------ Distributions to shareholders from: Net investment income Class III (4,730,381) (3,054,707) ------------ ------------ Total distributions from net investment income (4,730,381) (3,054,707) ------------ ------------ In excess of net investment income Class III -- (3,098,321) ------------ ------------ Total distributions in excess of net investment income -- (3,098,321) ------------ ------------ Net realized gains Class III (6,097,300) (5,840,251) ------------ ------------ Total distributions from net realized gains (6,097,300) (5,840,251) ------------ ------------ In excess of net realized gains Class III (7,803) -- ------------ ------------ Total distributions in excess of net realized gains (7,803) -- ------------ ------------ (10,835,484) (11,993,279) ------------ ------------ Net share transactions: (Note 5) Class III (12,681,947) 27,754,476 ------------ ------------ Increase (decrease) in net assets resulting from net share transactions (12,681,947) 27,754,476 ------------ ------------ Total increase (decrease) in net assets (8,525,835) 12,320,858 NET ASSETS: Beginning of period 127,600,424 115,279,566 ------------ ------------ End of period (including accumulated undistributed net investment income of $1,382,361 and $14,964, respectively) $119,074,589 $127,600,424 ============ ============
4 See accompanying notes to the financial statements. GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ----------------------------- 2000 1999 1998* -------- -------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.51 $ 11.87 $ 11.56 -------- -------- -------- Income from investment operations: Net investment income(b) 0.44 0.31 0.17+ Net realized and unrealized gain (loss) 0.91 (0.54) 1.30 -------- -------- -------- Total from investment operations 1.35 (0.23) 1.47 -------- -------- -------- Less distributions to shareholders: From net investment income (0.43) (0.28) (0.33) In excess of net investment income -- (0.29) --(c) From net realized gains (0.65) (0.56) (0.83) In excess of net realized gains --(f) -- -- -------- -------- -------- Total distributions (1.08) (1.13) (1.16) -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.78 $ 10.51 $ 11.87 ======== ======== ======== TOTAL RETURN(a) 12.77% (2.27)% 13.31%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $119,075 $127,600 $115,280 Net expenses to average daily net assets(d) 0.00% 0.00% 0.00%** Net investment income to average daily net assets(b) 4.18% 2.50% 1.91%** Portfolio turnover rate 26% 10% 18% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: --(e) $ 0.01 $ 0.01
(a) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. (c) The per share distribution in excess of net investment income was $0.001. (d) Net expenses excludes expenses incurred indirectly through investment in underlying funds. See Note 1. (e) Fees and expenses waved or borne by the Manager were less than $0.01 per share. (f) The per share distribution in excess of net realized gains is $0.001. + Computed using average shares outstanding throughout the period. ++ Not annualized. * Period from June 2, 1997 (commencement of operations) to February 28, 1998. ** Annualized. See accompanying notes to the financial statements. 5 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Global Balanced Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund operates as a "fund-of-funds" in that, pursuant to management provided by the Manager, it makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than the return of the GMO Global Balanced Index through investment to varying extents in other funds of the Trust. The Fund will pursue its objective by investing in Class III shares of domestic equity, international equity, and fixed income funds of the Trust. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. 6 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to the classification of distributions received from underlying funds. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $1,209,770 $(1,247,402) $37,632
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for 7 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .35% of the amount invested. In the case of cash redemptions, the fee is .11% of the amount redeemed. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000 the Fund received $56,308 in purchase premiums and $34,277 in redemption fees. There is no premium for reinvested distributions or in-kind transactions. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in the underlying funds, some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 8 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Manager determines the allocation of the assets of the Fund among designated underlying funds. The Manager does not charge an advisory fee for asset allocation advice provided to the Fund, but receives advisory and shareholder service fees from the underlying funds in which the Fund invests. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. No shareholder service fee is charged for Class III shares. GMO has contractually agreed to reimburse all expenses directly incurred by the Fund until June 30, 2000 (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses). The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $1,315. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000 aggregated $29,999,964 and $43,127,702, respectively. At February 29, 2000, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $128,813,854 $4,203,823 $(13,931,575) $(9,727,752)
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 53.0% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's outstanding shares. 9 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ------------------------- ----------------------- Shares Amount Shares Amount Class III: ----------- ------------ ---------- ----------- Shares sold 1,463,905 $ 16,122,366 2,130,109 $24,341,942 Shares issued to shareholders in reinvestment of distributions 937,011 10,247,908 1,001,505 11,059,081 Shares repurchased (3,494,064) (39,052,221) (695,474) (7,646,547) ----------- ------------ ---------- ----------- Net increase (decrease) (1,093,148) $(12,681,947) 2,436,140 $27,754,476 =========== ============ ========== ===========
10 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 56% of distributions as net capital gain dividends. 11 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham and Mr. Ben Inker are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham has been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. Mr. Inker has been with the firm for eight years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the Global Balanced Allocation Fund returned 12.8% for the twelve months ended February 29, 2000. During that period the benchmark (48.75% S&P 500/16.25% GMO EAFE Extended/35% Lehman Aggregate) returned 10.3%. Our fundamental conclusion at the outset of 1999 was that the developed, large cap equity markets in the U.S. and abroad were markedly overvalued. Our research indicated that better long-term returns could be achieved from investments in other asset classes, including both REITs and small caps in the U.S., emerging and small cap international equities and fixed income instruments. By diversifying out of large cap equities and into other asset classes with good return potential, we believed we were exposing our clients to a portfolio with better return potential and a reasonable level of risk. For the period, our emerging equities and small cap growth outperformed the benchmark by large margins, while small cap value and REITs underperformed substantially. During the fiscal year, the Fund was underweight in U.S. stocks by 18% relative to the benchmark. This weighting was split between emerging equities, which outperformed the S&P 500 by 56%, and fixed income, which underperformed the S&P 500 by 10%. Within U.S. stocks, we tilted the portfolio towards the most attractively valued sectors including real estate investment trusts (REITs), where we were 5% overweight. For the fiscal year, the allocation to REITs hurt performance, as the GMO REIT Fund underperformed the S&P 500 Index by 16%. Performance of the GMO Growth Fund was 33% above the S&P 500 and GMO Small Cap Growth was 56% above the S&P 500. However, this gain was partially offset by underperformance of the GMO Small Cap Value and Value Funds, which underperformed the S&P 500 by 1% and 20%, respectively. Performance of the International Core Fund lagged the benchmark substantially as the rally in expensive multinationals continued. The GMO International Core Fund returned 8%, underperforming the MSCI EAFE Index by 17%. The Fund was 7% overweight in emerging equities for the period, helping performance as both the GMO Emerging Markets Fund and the GMO Evolving Countries Fund outperformed the IFC Investable Composite by 9.5% and 31%, respectively. Collectively, the allocation to international equities added 1.3% to the Fund relative to the benchmark, with well more than 100% of this due to the overweight and strong implementation in emerging equities. The Fund was overweight 12% in fixed income, with allocations to international and emerging bonds along with U.S. fixed income. The drag on the portfolio due to the fixed income overweight was partially offset by the extremely strong performance (+46%) of emerging debt within the fixed income portfolio. GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- OUTLOOK The fundamentals of today's markets do not justify the extreme valuation disparities that we see. The investment climate has become astonishingly speculative, exemplified by the extraordinary returns of "new economy" stocks. Our conviction that these conditions cannot prevail indefinitely remains firm. As such, we will hold our positions, which remain remarkably cheap on a relative basis. With the eventual return to intrinsic value, we expect the opportunities for value-added resulting from these extreme conditions will be extraordinary with the good relative performance of the last year merely a small down payment. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO GLOBAL BALANCED ALLOCATION FUND CLASS III SHARES AND THE S&P 500 INDEX (50%)/LEHMAN AGGREGATE (50%) AS OF FEBRUARY 29, 2000 [GRAPH]
Average Annual Total Returns Inception 7/29/96 1yr 5yr 10yr (ITD)* 12.25 N/A 11.65
Date GMO Global Balanced Allocation Fund-III 50% SP500/50% Lehman Agg Bond GMO Global Balanced Index 7/29/96 9965 10000 10000 9/30/96 10583 10574 10604 12/31/96 11205 11175 11206 3/31/97 11307 11298 11357 6/30/97 12255 12476 12672 9/30/97 13114 13159 13304 12/31/97 12979 13548 13462 3/31/98 13910 14587 14766 6/30/98 13638 15001 15116 9/30/98 12562 14590 14260 12/31/98 13548 16122 16174 3/31/99 13485 16482 16563 6/30/99 14526 16988 17178 9/30/99 14083 16510 16783 12/31/99 15034 17701 18445 2/29/00 14852 17169 17778
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 35 bp on the purchase and 11 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. *Performance is linked to Class I shares (originating share class) and is converted to Class III shares on June 2, 1997 (commencement date of Class III shares). GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO International Equity Allocation Fund at February 29, 2000, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ MUTUAL FUNDS -- 100.0% 377,841 GMO Emerging Country Debt Fund 3,302,326 736,141 GMO Emerging Markets Fund 8,215,334 1,061,198 GMO Evolving Countries Fund 12,108,267 196,955 GMO Inflation Indexed Bond Fund 1,914,405 181,215 GMO International Bond Fund 1,665,362 2,140,337 GMO International Core Fund 44,754,441 244,551 GMO International Small Companies Fund 2,822,119 131,257 GMO U.S. Bond/Global Alpha A Fund 1,265,313 ------------ TOTAL MUTUAL FUNDS (COST $70,141,702) 76,047,567 ------------ SHORT-TERM INVESTMENTS -- 0.0% REPURCHASE AGREEMENT -- 0.0% $ 7,382 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $7,383 and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest of $7,530. 7,382 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $7,382) 7,382 ------------ TOTAL INVESTMENTS -- 100.0% (Cost $70,149,084) 76,054,949 Other Assets and Liabilities (net) -- (0.0%) (8,101) ------------ TOTAL NET ASSETS -- 100.0% $ 76,046,848 ============
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $70,149,084) (Note 1) $ 76,054,949 Receivable for investments sold 68,000 Receivable for expenses waived or borne by Manager (Note 2) 3,935 ------------ Total assets 76,126,884 ------------ LIABILITIES: Payable for Fund shares repurchased 65,000 Accrued expenses 15,036 ------------ Total liabilities 80,036 ------------ NET ASSETS $ 76,046,848 ============ NET ASSETS CONSIST OF: Paid-in capital $ 75,018,749 Accumulated undistributed net investment income 2,339,736 Accumulated net realized loss (7,217,502) Net unrealized appreciation 5,905,865 ------------ $ 76,046,848 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $ 76,046,848 ============ SHARES OUTSTANDING: Class III 7,703,655 ============ NET ASSET VALUE PER SHARE: Class III $ 9.87 ============
2 See accompanying notes to the financial statements. GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 1,902,062 Interest 456 ----------- Total income 1,902,518 ----------- EXPENSES: Audit fees 17,465 Custodian and transfer agent fees 12,411 Registration fees 2,533 Legal fees 2,289 Trustees fees (Note 2) 1,025 Miscellaneous 1,369 Fees waived or borne by Manager (Note 2) (37,092) ----------- Net expenses -- ----------- Net investment income 1,902,518 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (6,003,884) Realized gain distributions from investment company shares 1,609,100 ----------- Net realized loss (4,394,784) Change in net unrealized appreciation (depreciation) on investments 22,936,622 ----------- Net realized and unrealized gain 18,541,838 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $20,444,356 ===========
See accompanying notes to the financial statements. 3 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,902,518 $ 1,656,149 Net realized gain (loss) (4,394,784) 1,219,443 Change in net unrealized appreciation (depreciation) 22,936,622 (10,858,440) ------------ ------------ Net increase (decrease) in net assets from operations 20,444,356 (7,982,848) ------------ ------------ Distributions to shareholders from: Net investment income Class III (624,175) (1,656,149) ------------ ------------ Total distributions from net investment income (624,175) (1,656,149) ------------ ------------ In excess of net investment income Class III -- (2,114,210) ------------ ------------ Total distributions in excess of net investment income -- (2,114,210) ------------ ------------ Net realized gains Class III (2,308,096) (4,795,515) ------------ ------------ Total distributions from net realized gains (2,308,096) (4,795,515) ------------ ------------ (2,932,271) (8,565,874) ------------ ------------ Net share transactions: (Note 5) Class III (31,626,405) 20,834,383 ------------ ------------ Increase (decrease) in net assets resulting from net share transactions (31,626,405) 20,834,383 ------------ ------------ Total increase (decrease) in net assets (14,114,320) 4,285,661 NET ASSETS: Beginning of period 90,161,168 85,875,507 ------------ ------------ End of period (including accumulated undistributed net investment income of $2,339,736 and $0, respectively) $ 76,046,848 $ 90,161,168 ============ ============
4 See accompanying notes to the financial statements. GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------ 2000 1999 1998 1997* ------- ------- ------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.28 $ 10.18 $ 10.41 $ 10.00 ------- ------- ------- ------- Income from investment operations: Net investment income(a) 0.22+ 0.19+ 0.33+ 0.10 Net realized and unrealized gain (loss) 1.73 (1.01) 0.31 0.41 ------- ------- ------- ------- Total from investment operations 1.95 (0.82) 0.64 0.51 ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.08) (0.19) (0.29) (0.07) In excess of net investment income -- (0.31) --(b) -- From net realized gains (0.28) (0.58) (0.58) (0.03) ------- ------- ------- ------- Total distributions (0.36) (1.08) (0.87) (0.10) ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.87 $ 8.28 $ 10.18 $ 10.41 ======= ======= ======= ======= TOTAL RETURN(c) 23.58% (8.77)% 6.73% 5.11%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $76,047 $90,161 $85,876 $30,459 Net expenses to average daily net assets(d) 0.00% 0.00% 0.00% 0.01%** Net investment income to average daily net assets(a) 2.24% 2.06% 3.13% 3.60%** Portfolio turnover rate 8% 36% 16% 0% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: --(e) $ 0.01 $ 0.01 $ 0.01
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. (b) The per share distribution in excess of net investment income was $0.001. (c) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (d) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 1. (e) Fees and expenses waived or borne by the Manager were less than $0.01 per share. * Period from October 11, 1996 (commencement of operations) to February 28, 1997. ** Annualized. + Computed using average shares outstanding throughout the period. ++ Not annualized. See accompanying notes to the financial statements. 5 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO International Equity Allocation Fund (the "Fund"), is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund operates as a "fund-of-funds" in that, pursuant to management provided by the Manager, it makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than the return of the GMO EAFE Extended benchmark through investment to varying extents in other Funds of the Trust. The Fund will pursue its objective by investing in Class III shares of international equity and fixed income funds of the Trust. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. 6 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to the classification of distributions received from underlying funds. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $1,061,393 $ (1,224,974) $163,581
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for 7 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .80% of the amount invested. In the case of cash redemptions, the fee is .11% of the amount redeemed. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $6,311 in purchase premiums and $38,774 in redemption fees. There is no premium for reinvested distributions or in-kind transactions. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in the underlying funds, some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 8 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Manager determines the allocation of the assets of the Fund among designated underlying funds. The Manager does not charge an advisory fee for asset allocation advice provided to the Fund, but receives advisory and shareholder service fees from the underlying funds in which the Fund invests. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. No shareholder service fee is charged for Class III shares. GMO has contractually agreed to reimburse all expenses directly incurred by the Fund until June 30, 2000 (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses). The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $1,025. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $6,850,792 and $37,901,457, respectively. At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $72,959,021 $5,443,184 $(2,347,256) $3,095,928
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 58.4% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. 9 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ------------------------- ----------------------- Shares Amount Shares Amount Class III: ----------- ------------ ---------- ----------- Shares sold 78,119 $ 788,869 4,350,530 $37,996,130 Shares issued to shareholders in reinvestment of distributions 286,054 2,864,228 770,742 7,138,503 Shares repurchased (3,552,188) (35,279,502) (2,665,394) (24,300,250) ----------- ------------ ---------- ----------- Net increase (decrease) (3,188,015) $(31,626,405) 2,455,878 $20,834,383 =========== ============ ========== ===========
10 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 78.6% of the distributions as net capital gain dividends. At February 29, 2000 the Fund had a capital loss carryforward available to offset future capital gains, if any, of the following amount:
Year of Expiration Amount ------------------------------------------------------------ ---------- 2008 $4,407,565
11 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGER Mr. R. Jeremy Grantham and Mr. Ben Inker are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham has been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. Mr. Inker has been with the firm for eight years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the International Equity Allocation Fund returned 23.6% for the twelve months ended February 29, 2000. The Fund's benchmark, the GMO EAFE Extended + Index, returned 26.6%. During fiscal 1999, the Fund's performance lagged the benchmark by 3%. This was basically due to a tug-of-war between the strong performance of emerging markets and strong implementation in the emerging funds, and very weak implementation in international developed equities and the drag of a fixed income allocation. The International Core Fund (the Fund's largest holding) returned 8%, underperforming its index by 17%. This was due to stock selection, and in particular to the Fund's tilt towards value. Because of the opportunities represented by the wide dispersion in price-to-book ratios, the Fund is heavily concentrated in the cheaper stocks on price-to-book. The Fund is 50% invested in the cheapest 25% of stocks within the EAFE universe and 90% within the cheapest half. Those groups underperformed EAFE by -14.5% and -9.3% respectively for the fiscal year. The Fund was further hurt by its emphasis on smaller capitalization stocks, which underperformed significantly even after accounting for their overlap with value. Small stocks within EAFE underperformed by -17%, and small value stocks underperformed by -30%. Value stocks did very poorly whether defined on the basis of book, earnings, sales or dividend yield, which shows that the Fund's underperformance is not a consequence of focussing on price-to-book as a valuation measure. The Fund's more sophisticated value models, which make further adjustments to credit companies for growth and financial quality, fared equally poorly. In this overheated environment, reasonable adjustments did not suffice to make the most expensive price-to-book stocks look attractive. Much of the size and value underperformance was driven by telecommunications and technology stocks. Of that, over 7% of negative attribution is due to just five large capitalization stocks that doubled or tripled in price from expensive starting levels. The Fund was overweight 10% in fixed income, with allocations to international and emerging bonds along with U.S. fixed income. The drag on the portfolio due to the fixed income overweight was substantially offset by the extremely strong performance (+46%) of emerging debt within the fixed income portfolio. OUTLOOK Based on a careful analysis of current company fundamentals and valuation, GMO has decided to retain its substantial overweights in value stocks and small companies in order to benefit from the inevitable rebound. While the growth oriented bull market of the last few years has been a difficult period for the International GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- Core Fund, it leaves us at a moment of great opportunity. For value investors it is always darkest before the dawn. Markets overshoot fair value, and it is difficult to call the turning points. Yet the greater the overshoot past fair value, the more certain is the eventual rebound, and greater is the reward to those that participate. Despite the strong performance of emerging equity in 1999, we are also maintaining our overweight here. Emerging equities are still very cheap relative to the developed markets, and the recovery process from the crises of 1997-98 still has more room to go. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO INTERNATIONAL EQUITY ALLOCATION FUND CLASS III SHARES AND THE MSCI ALL COUNTRY WORLD EX-U.S. INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 10/11/96 1yr 5yr 10yr (ITD) 22.46 N/A 6.9
[GRAPH]
Date GMO International Equity Allocation Fund-III MSCI AC World ex US GMO EAFE Extended + 10/11/96 9920 10000 10000 12/31/96 10186 10254 10317 3/31/97 10306 10246 10435 6/30/97 11198 11575 11627 9/30/97 11486 11461 11719 12/31/97 10363 10430 10853 3/31/98 11774 11858 12470 6/30/98 10932 11648 12412 9/30/98 9192 9890 10590 12/31/98 10570 11901 12672 3/31/99 10668 12211 12787 6/30/99 12249 12845 13246 9/30/99 12222 13264 13722 12/31/99 13399 15685 16145 2/29/00 12533 15286 15585
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 80 bp on the purchase and 11 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Intrinsic Value Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for the period from August 2, 1999 (commencement of operations) through February 29, 2000, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ COMMON STOCKS -- 96.9% AEROSPACE -- 0.7% 1,900 Cordant Technologies Inc 61,512 4,300 Goodrich (BF) Co 102,931 2,800 Northrop Grumman Corp 127,225 ------------ 291,668 ------------ AUTOMOTIVE -- 7.7% 4,600 Autonation Inc* 34,787 3,600 Cooper Tire & Rubber Co 38,925 15,800 Ford Motor Co 657,675 25,800 General Motors Corp 1,962,412 700 General Motors Corp, Class H* 84,350 2,600 Genuine Parts Co 58,662 2,900 Goodyear Tire & Rubber Co 65,794 2,500 Meritor Automotive Inc 35,000 800 Paccar Inc 34,450 800 Tenneco Automotive Inc 5,900 ------------ 2,977,955 ------------ BANKING AND FINANCIAL SERVICES -- 13.1% 3,300 Astoria Financial Corp 78,581 2,000 Bancwest Corp 30,375 6,900 Bank of America Corp 317,831 13,700 Bank One Corp 353,631 7,980 Bear Stearns Cos Inc 313,215 6,700 Chase Manhattan Corp 533,487 700 Commercial Federal Corp 9,056 5,200 Countrywide Credit Industries Inc 129,675 200 Donaldson Lufkin & Jenrette 8,687 4,600 Edwards (AG) Inc 145,762 5,800 Fannie Mae 307,400 300 Financial Security Assurance Holdings Ltd 13,500 8,500 First Union Corp 250,750 500 Fleet Boston Financial Corp 13,625 7,300 Franklin Resources Inc 198,469 8,100 Golden West Financial Corp 230,850 5,300 Greenpoint Financial Corp 84,469 1,400 Heller Financial Inc 26,337 6,700 J.P. Morgan & Co Inc 743,700
See accompanying notes to the financial statements. 1 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ BANKING AND FINANCIAL SERVICES -- CONTINUED 5,400 Key Corp 91,462 6,400 Lehman Brothers Holding Inc 464,000 500 Leucadia National Corp 10,687 3,900 MGIC Investment Corp 145,762 4,500 Pacific Century Financial Corp 68,344 3,250 PMI Group Inc 118,016 6,400 Rowe (T) Price & Associates Inc 210,800 8,700 Sovereign Bancorp Inc 63,075 1,800 UnionBanCal Corp 57,825 1,600 Washington Mutual Inc 35,400 ------------ 5,054,771 ------------ CHEMICALS -- 0.8% 4,000 Engelhard Corp 54,500 5,200 IMC Global Inc 70,200 3,200 Millenium Chemicals Inc 44,800 1,800 PPG Industries Inc 88,875 1,000 Praxair Inc 33,750 ------------ 292,125 ------------ COMPUTER AND OFFICE EQUIPMENT -- 3.6% 3,700 Advanced Micro Devices Inc* 144,762 14,600 Oracle Corp* 1,084,050 3,000 Reynolds & Reynolds Inc, Class A 82,875 4,100 Silicon Graphics Inc* 40,231 1,400 Sterling Software Inc* 50,225 ------------ 1,402,143 ------------ CONSTRUCTION -- 0.1% 1,500 Georgia-Pacific Corp 52,031 ------------ CONSUMER GOODS -- 2.0% 200 Eastman Kodak Co 11,462 2,800 Fastenal Co 123,725 4,500 Fortune Brands Inc 98,437 1,600 Hon Industries Inc 29,500 6,700 Jones Apparel Group Inc* 151,587 3,500 Lancaster Colony Corp 104,125 2,600 Liz Claiborne Inc 97,337
2 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CONSUMER GOODS -- CONTINUED 1,400 Polo Ralph Lauren Corp* 23,450 1,000 Steelcase Inc 12,250 2,800 US Industries Inc 32,025 1,100 VF Corp 27,156 4,400 Warnaco Group Inc, Class A 47,850 ------------ 758,904 ------------ ELECTRONIC EQUIPMENT -- 2.8% 10,800 American Power Conversion Corp* 366,525 3,200 Andrew Corp* 79,200 4,500 Arrow Electronics Inc* 136,125 4,200 Emerson Electric Co 191,362 2,000 Harris Corp 63,750 1,500 Hubbell Inc, Class B 36,469 500 Litton Industries* 14,969 9,600 Raytheon Co, Class B 177,600 ------------ 1,066,000 ------------ FOOD AND BEVERAGE -- 3.8% 17,115 Archer Daniels Midland Co 172,220 4,800 IBP Inc 60,000 16,700 Nabisco Group Holdings 144,037 17,100 Seagrams Co Ltd 1,004,625 1,600 Unilever NV 72,800 ------------ 1,453,682 ------------ HEALTH CARE -- 0.7% 3,500 Columbia HCA Healthcare Corp 67,594 900 Dentsply International Inc 23,062 900 First Health Group Corp* 21,712 21,300 Healthsouth Corp* 103,837 800 Trigon Healthcare Inc* 25,550 600 United Healthcare Corp 30,675 ------------ 272,430 ------------ INSURANCE -- 8.4% 8,000 Aetna Life and Casualty Co 329,000 100 Alleghany Corp* 18,594
See accompanying notes to the financial statements. 3 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ INSURANCE -- CONTINUED 2,700 Allmerica Financial Corp 112,725 14,700 Allstate Corp 286,650 200 AMBAC Inc 8,787 900 American Financial Group Inc 18,900 200 American General Corp 10,437 1,200 American National Insurance Co 70,200 2,700 Chubb Corp 132,806 3,300 Cigna Corp 243,581 6,200 Cincinnati Financial Corp 185,225 1,800 CNA Financial Corp* 48,600 13,500 Conseco Inc 197,437 1,700 Everest Re Group Ltd 41,756 9,200 Foundation Health Systems Inc, Class A* 76,475 1,200 Fremont General Corp 8,700 3,500 Hartford Financial Services Group Inc 109,375 4,900 Humana Inc* 33,381 5,000 Lincoln National Corp 139,062 5,500 Loews Corp 244,750 1,800 MBIA Inc 69,075 1,300 Mercury General Corp 29,494 5,400 Old Republic International Corp 63,112 6,400 Safeco Corp 134,400 10,000 Saint Paul Cos Inc 223,750 4,700 Torchmark Corp 93,119 800 Transatlantic Holding Inc 56,350 5,700 Travelers Property Casualty Corp, Class A 180,262 2,800 Unitrin Inc 95,025 ------------ 3,261,028 ------------ MACHINERY -- 2.0% 3,500 Cooper Cameron Corp* 193,375 1,600 Cummins Engine Inc 53,300 10,200 Deere and Co 364,650 2,400 FMC Corp* 115,950 900 R&B Falcon Corp* 13,894 1,100 York International Corp 19,937 ------------ 761,106 ------------
See accompanying notes to the financial statements. 4 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ MANUFACTURING -- 1.7% 400 Blyth Industries Inc* 8,975 5,400 Clayton Homes Inc 43,875 4,000 Crane Co 79,500 4,600 International Game Technology* 81,937 2,100 Minnesota Mining and Manufacturing Co 185,062 2,800 Rockwell International Corp 126,700 2,500 Temple Inland Inc 127,812 ------------ 653,861 ------------ METALS AND MINING -- 1.7% 9,100 Alcan Aluminum Ltd 300,300 3,749 Phelps Dodge Corp 176,672 3,100 Reynolds Metals Co 196,850 ------------ 673,822 ------------ OIL AND GAS -- 3.3% 4,700 Amerada Hess Corp 237,644 4,600 Apache Corp 167,900 1,000 BJ Services Co* 57,062 4,600 Diamond Offshore Drilling Inc 146,050 2,200 Ensco International Inc 66,550 300 Kerr-McGee Corp 13,425 3,500 Kinder Morgan Inc 97,562 2,000 Nabors Industries Inc* 71,750 1,400 Pioneer Natural Resources Co* 11,637 1,700 Questar Corp 23,694 1,500 Rowan Cos Inc* 37,688 5,900 Tidewater Inc 167,044 3,200 Transocean Sedco Forex Inc 126,200 1,600 USX - Marathon Group 34,600 ------------ 1,258,806 ------------ PAPER AND ALLIED PRODUCTS -- 2.9% 2,100 Boise Cascade Corp 62,606 1,000 Bowater Inc 49,188 4,200 Champion International Corp 217,350 500 Consolidated Papers Inc 18,969 3,700 Ikon Office Solutions Inc 25,900 13,200 International Paper Co 485,925
See accompanying notes to the financial statements. 5 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ PAPER AND ALLIED PRODUCTS -- CONTINUED 2,900 Louisiana Pacific Corp 34,256 4,300 Mead Corp 128,731 3,400 Westvaco Corp 93,713 ------------ 1,116,638 ------------ PHARMACEUTICALS -- 4.1% 15,400 Abbott Laboratories 504,350 10,900 Amgen Inc* 743,244 5,700 Bristol Myers Squibb Co 323,831 200 ICN Pharmaceuticals Inc 3,975 800 Nu Skin Enterprises Inc* 7,150 ------------ 1,582,550 ------------ PRIMARY MATERIALS -- 0.2% 400 Carlisle Cos Inc 13,250 5,500 Crown Cork & Seal Inc 77,000 ------------ 90,250 ------------ PRIMARY PROCESSING -- 1.0% 1,100 Howmet International Inc* 20,144 4,200 Nucor Corp 208,688 7,000 USX-US Steel Group Inc 153,125 ------------ 381,957 ------------ PRINTING AND PUBLISHING -- 0.3% 2,400 TV Guide Inc, Class A* 113,100 ------------ REAL ESTATE -- 1.7% 1,400 AMB Property Corp, REIT 28,263 2,200 Archstone Communities Trust, REIT 43,038 2,400 Arden Realty Group Inc, REIT 49,950 1,600 Avalonbay Communities Inc, REIT 54,000 1,700 CarrAmerica Realty Corp, REIT 36,125 2,300 Cornerstone Properties Inc, REIT 38,813 2,700 Crescent Real Estate Equities, REIT 46,069 1,300 Duke Realty Investments, REIT 23,888 3,300 Equity Office Properties Trust, REIT 78,994 1,000 Equity Residential Properties Trust, REIT 39,938
6 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ REAL ESTATE -- CONTINUED 2,200 Highwood Properties Inc, REIT 46,063 5,100 HRPT Properties Trust, REIT 40,800 600 Liberty Property Trust, REIT 13,613 1,200 Mack-Cali Realty Corp, REIT 28,500 6,900 Meditrust Corp, REIT 19,406 400 Post Properties Inc, REIT 15,050 1,700 Public Storage Inc, REIT 37,506 ------------ 640,016 ------------ REFINING -- 1.0% 3,500 Ashland Inc 108,938 200 Murphy Oil Corp 10,125 2,500 Sunoco Inc 61,719 4,100 Tosco Corp 109,675 5,400 Ultramar Diamond Shamrock Corp 117,113 ------------ 407,570 ------------ RETAIL TRADE -- 3.7% 2,689 Albertsons Inc 65,881 7,100 Autozone Inc* 174,394 4,500 Bed, Bath & Beyond Inc* 127,688 5,000 Dillard's Inc 86,875 9,900 Federated Department Stores Inc* 363,206 20,400 Kmart Corp* 179,775 1,200 Neiman Marcus Group Inc, Class A* 25,575 1,600 Outback Steakhouse Inc* 41,800 1,000 Payless ShoeSource Inc* 39,500 1,500 Penney (JC) Co Inc 23,625 6,100 Ross Stores Inc 88,450 400 Sears Roebuck & Co 11,025 13,500 Toys R Us Inc* 167,063 3,600 Venator Group Inc* 20,475 ------------ 1,415,332 ------------ SERVICES -- 0.8% 300 BHC Communications Inc, Class A 47,850 900 Chris Craft Industries Inc* 59,231 2,600 Fluor Corp 73,938 600 Harrahs Entertainment Inc* 11,475
See accompanying notes to the financial statements. 7 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SERVICES -- CONTINUED 3,900 Mandalay Resort Group* 54,844 100 Manpower Inc 3,269 1,200 Modis Professional Services Inc* 18,900 1,300 Premier Parks Inc* 26,325 ------------ 295,832 ------------ TECHNOLOGY -- 3.7% 400 Adobe Systems Inc 40,800 2,700 Autodesk Inc 120,656 1,000 Avnet Inc 66,875 7,500 BMC Software Inc* 345,000 2,100 Gartner Group Inc, Class A 30,056 10,500 Honeywell International Inc 505,313 500 Intel Corp 56,500 3,600 Seagate Technology Corp* 179,550 6,600 Thermo Electron Corp* 103,125 ------------ 1,447,875 ------------ TELECOMMUNICATIONS -- 8.6% 5,800 AT & T Corp 286,738 11,000 AT & T Liberty Media Group* 574,750 1,400 Bell Atlantic Corp 68,513 2,000 Bellsouth Corp 81,500 13,500 GTE Corp 796,500 1,200 MediaOne Group Inc* 94,200 1,700 PanAmSat Corp* 82,981 3,853 SBC Communications Inc 146,414 800 Sprint Corp 48,800 3,100 Telephone and Data Systems Inc 327,050 1,700 United States Cellular Corp* 113,794 12,900 Viacom Inc, Class B* 719,175 ------------ 3,340,415 ------------ TOBACCO -- 1.0% 19,200 Philip Morris Cos Inc 385,200 ------------ TRANSPORTATION -- 4.1% 7,100 AMR Corp* 375,413 2,700 Brunswick Corp 47,756
8 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ TRANSPORTATION -- CONTINUED 19,500 Burlington Northern Santa Fe Railroad Co 383,906 1,000 Continental Airlines Inc, Class B* 31,625 6,500 CSX Corp 144,219 700 Delta Air Lines Inc 31,938 400 Norfolk Southern Corp 5,425 2,700 UAL Corp* 131,625 11,500 Union Pacific Corp 437,000 ------------ 1,588,907 ------------ UTILITIES -- 11.4% 800 Allegheny Energy Inc 20,750 1,100 Alliant Energy Corp 30,938 2,300 Ameren Corp 69,000 2,200 American Electric Power Inc 61,875 6,800 Central & South West Corp 114,325 8,600 Citizens Utilities, Class B* 131,150 2,300 Connectiv Inc 32,775 3,900 Consolidated Edison Inc 107,494 5,000 Constellation Energy Group Inc 148,750 8,200 Dominion Resources Inc 300,838 4,500 DTE Energy Co 135,844 700 Dynegy Inc 32,813 11,000 Edison International 289,438 4,300 El Paso Energy Corp 159,369 1,500 Energy East Corp 31,500 9,000 Entergy Corp 182,250 7,800 Firstenergy Corp 145,763 4,700 General Public Utilities Inc 116,913 3,200 Keyspan Corp 65,200 1,300 Kinder Morgan Energy Partners 51,350 500 New England Electric System 27,000 8,700 Niagara Mohawk Holdings Inc* 102,225 6,900 Northeast Utilities 129,806 3,800 Northern States Power Co 66,738 13,600 PG & E Corp 280,500 2,600 Pinnacle West Capital Corp 71,825 3,400 Potomac Electric Power Co 69,063 5,000 Public Service Enterprise Group Inc 145,000 600 Puget Sound Power and Light Co 12,188 3,300 Reliant Energy Inc 67,856 1,500 SCANA Corp 35,719
See accompanying notes to the financial statements. 9 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ UTILITIES -- CONTINUED 14,800 Southern Co 328,375 14,100 Texas Utilities Co 460,013 7,300 Unicom Corp 276,031 3,000 Western Resources Inc 46,313 3,100 Wisconsin Energy Corp 54,831 ------------ 4,401,818 ------------ TOTAL COMMON STOCKS (COST $44,085,685) 37,437,792 ------------ PAR VALUE ($) - -------------- SHORT-TERM INVESTMENTS -- 7.8% CASH EQUIVALENTS -- 4.8% $ 1,525,870 BankBoston Eurodollar Time Deposit, 6.1175%, due 4/28/00(a) 1,525,870 $ 141,371 First Union National Bank Time Deposit, 5.8125%, due 3/01/00(a) 141,371 $ 212,059 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(a) 212,059 ------------ 1,879,300 ------------ U.S. GOVERNMENT -- 0.3% $ 125,000 U.S. Treasury Bill, 5.689%, due 6/29/00(b) 122,662 ------------ REPURCHASE AGREEMENT -- 2.7% $ 1,030,813 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $1,030,955 and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest, of $1,051,429. 1,030,813 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $3,032,838) 3,032,775 ------------ TOTAL INVESTMENTS -- 104.7% (Cost $47,118,523) 40,470,567 Other Assets and Liabilities (net) -- (4.7%) (1,820,679) ------------ TOTAL NET ASSETS -- 100.0% $ 38,649,888 ============
See accompanying notes to the financial statements. 10 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000 NOTES TO THE SCHEDULE OF INVESTMENTS:
REIT - Real Estate Investment Trust * Non-income producing security. (a) Represents investments of security lending collateral (Note 1). (b) Security has been segregated to cover margin requirements on open financial futures contracts (Note 6). See accompanying notes to the financial statements. 11 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $47,118,523) (Note 1) $40,470,567 Dividends and interest receivable 96,349 Receivable for variation margin on open futures contracts (Notes 1 and 6) 12,150 Receivable for expenses waived or borne by Manager (Note 2) 2,603 ----------- Total assets 40,581,669 ----------- LIABILITIES: Payable upon return of securities loaned (Note 1) 1,879,300 Payable to affiliate for (Note 2): Management fee 10,346 Shareholder service fee 4,703 Accrued expenses 37,432 ----------- Total liabilities 1,931,781 ----------- NET ASSETS $38,649,888 =========== NET ASSETS CONSIST OF: Paid-in capital $44,937,664 Accumulated undistributed net investment income 108,358 Accumulated net realized gain 277,663 Net unrealized depreciation (6,673,797) ----------- $38,649,888 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $38,649,888 =========== SHARES OUTSTANDING: Class III 4,396,330 =========== NET ASSET VALUE PER SHARE: Class III $ 8.79 ===========
12 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- PERIOD FROM AUGUST 2, 1999 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $1,696) $ 517,844 Interest (including securities lending income of $1,874) 40,925 ----------- Total income 558,769 ----------- EXPENSES: Management fee (Note 2) 76,163 Audit fees 38,918 Custodian and transfer agent fees 15,659 Registration fees 6 Legal fees 476 Trustees fees (Note 2) 341 Miscellaneous 2,518 Fees waived or borne by Manager (Note 2) (57,918) ----------- 76,163 Shareholder service fee (Note 2) Class III 34,620 ----------- Net expenses 110,783 ----------- Net investment income 447,986 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 278,757 Closed futures contracts (4,880) ----------- Net realized gain 273,877 ----------- Change in net unrealized appreciation (depreciation) on: Investments (5,480,544) Open futures contracts (25,841) ----------- Net unrealized loss (5,506,385) ----------- Net realized and unrealized loss (5,232,508) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(4,784,522) ===========
. See accompanying notes to the financial statements. 13 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD FROM AUGUST 2, 1999 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 29, 2000 ---------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 447,986 Net realized gain 273,877 Change in net unrealized appreciation (depreciation) (5,506,385) ----------- Net decrease in net assets from operations (4,784,522) ----------- Distributions to shareholders from: Net investment income Class III (335,842) ----------- Total distributions from net investment income (335,842) ----------- Net share transactions: (Note 5) Class III 43,770,252 ----------- Increase in net assets resulting from net share transactions 43,770,252 ----------- Total increase in net assets 38,649,888 NET ASSETS: Beginning of period -- ----------- End of period (including accumulated undistributed net investment income of $108,358) $38,649,888 ===========
14 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM AUGUST 2, 1999 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 29, 2000 ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 ------- Income from investment operations: Net investment income 0.11+ Net realized and unrealized loss (1.24) ------- Total from investment operations (1.13) ------- Less distributions to shareholders: From net investment income (0.08) ------- Total distributions (0.08) ------- NET ASSET VALUE, END OF PERIOD $ 8.79 ======= TOTAL RETURN(a) (11.36)%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $38,650 Net expenses to average daily net assets 0.48%* Net investment income to average daily net assets 1.94%* Portfolio turnover rate 26% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01
(a) Calculation excludes purchase premiums. The total return would have been lower had certain expenses not been waived during the period shown. * Annualized. + Computed using average shares throughout the period. ++ Not annualized. See accompanying notes to the financial statements. 15 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Intrinsic Value Fund (the "Fund"), which commenced operations on August 2, 1999, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 25, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term capital growth through investment in equity securities. The Funds benchmark is the Russell 1000 Value Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an 16 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund loaned securities having a market value of $1,818,444 collateralized by cash in the amount of $1,879,300 which was invested in short-term instruments. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund enters into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The Fund also enters into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the 17 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 29, 2000 the Fund had no open swap contracts. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to the classification of distributions from REIT securities. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable 18 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $(3,786) $3,786 $ --
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .14% of the amount invested. All purchase premiums are paid to and recorded by the Fund as paid-in capital. For the period ended February 29, 2000, the Fund received $5,591 in purchase premiums. There is no premium for redemptions, reinvested distributions or in-kind transactions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. 19 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the period ended February 29, 2000 was $341. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended February 29, 2000, aggregated $53,681,177 and $9,874,250, respectively. At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $47,179,118 $2,801,739 $(9,510,290) $(6,708,551)
4. PRINCIPAL SHAREHOLDER At February 29, 2000, 90.5% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder could have a material effect. 20 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from August 2, 1999 (commencement of operations) through February 29, 2000 ---------------------------- Shares Amount Class III: ------------- ------------- Shares sold 4,395,372 $ 43,761,197 Shares issued to shareholders in reinvestment of distributions 958 9,055 Shares repurchased -- -- ------------- ------------- Net increase 4,396,330 $ 43,770,252 ============= =============
The Fund was formed with an initial tax-free contribution of securities-in-kind, which had a historical cost of $36,907,073 and unrealized depreciation of $1,167,412 on the date of contribution. 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FUTURES CONTRACTS
Number of Contracts Type ----------------------------------- --------------------------------------------- Buys 2 S&P 500 Number of Contract Net Unrealized Contracts Expiration Date Value Depreciation -------------------------- --------------------------------------------- -------- -------------- Buys 2 March 2000 $686,000 $(25,841) ========
At February 29, 2000 the Fund has sufficient cash and/or securities to cover any commitments or margin on open futures contracts. 21 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are primarily responsible for the day-to-day management of the Fund's portfolio. Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Intrinsic Value Fund returned -11.4% for the fiscal year ended February 29, 2000 (since the Fund's August 2, 1999 inception) as compared to 3.6% for the S&P 500 and -12.3% for the Russell 1000 Value Index. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in common stocks throughout the period. For the fiscal year, U.S. market returns were dominated by technology and telecommunications stocks. Value stocks across all market capitalization bands underperformed growth stocks. Sector selection detracted modestly from performance. The Fund's overweight in auto/transportation, electric utilities and materials/ processing stocks detracted -120 basis points from relative performance in aggregate. This positioning offset positive contributions from the Fund's overweight in technology stocks coupled with the underweight in financial services stocks, which added 90 basis points to performance in aggregate. The Fund's outperformance relative to the benchmark for the fiscal year was attributable to strong stock selection. Selection was particularly strong in technology, pharmaceutical, consumer staple (beverage) and auto/transportation stocks. Selection in these stocks contributed over 250 basis points in aggregate. Strong selection offset weak selection among financial services, electric utilities and consumer discretionary stocks. OUTLOOK Value stocks are significantly undervalued compared to growth stocks. The spread of value stocks relative to growth stocks is at its widest level since the early 1970's. The Fund is overweight in both auto/transportation stocks and electric utilities, reflecting our preference for value stocks. We are gradually reducing our exposure to technology stocks. While earlier in 1999 many of these stocks were attractive to our intrinsic value methodology, most technology stocks have now appreciated to a point where they are now expensive on this measure. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO INTRINSIC VALUE FUND CLASS III SHARES AND THE RUSSELL 1000 VALUE INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 8/2/99 1yr 5yr 10yr (ITD) N/A N/A -11.48
[GRAPH]
Date GMO Intrinsic Value Fund-III Russell 1000 Value 8/2/99 9986 10000 9/30/99 9277 9287 12/31/99 9919 9792 2/29/00 8852 8769
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 14 bp on the purchase. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO World Equity Allocation Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MUTUAL FUNDS -- 100.0% 15,852 GMO Currency Hedged International Core Fund 159,159 67,686 GMO Emerging Country Debt Fund 591,574 91,237 GMO Emerging Markets Fund 1,018,200 109,045 GMO Evolving Countries Fund 1,244,199 15,715 GMO Growth Fund 77,791 44,590 GMO Inflation Indexed Bond Fund 433,411 21,471 GMO International Bond Fund 197,317 161,642 GMO International Core Fund 3,379,926 17,513 GMO International Small Companies Fund 202,102 65,080 GMO REIT Fund 537,561 23,651 GMO Small Cap Growth Fund 398,985 40,723 GMO Small Cap Value Fund 505,367 25,623 GMO U.S. Bond/Global Alpha A Fund 247,001 97,019 GMO U.S. Core Fund 1,613,431 28,422 GMO Value Fund 226,807 ------------- TOTAL MUTUAL FUNDS (COST $10,614,210) 10,832,831 ------------- SHORT-TERM INVESTMENTS -- 0.1% REPURCHASE AGREEMENT -- 0.1% $ 12,419 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $12,421 and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest, of $12,668. 12,419 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $12,419) 12,419 ------------- TOTAL INVESTMENTS -- 100.1% (Cost $10,626,629) 10,845,250 Other Assets and Liabilities (net) -- (0.1%) (11,121) ------------- TOTAL NET ASSETS -- 100.0% $ 10,834,129 =============
See accompanying notes to the financial statements. 1 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $10,626,629) (Note 1) $10,845,250 Receivable for expenses waived or borne by Manager (Note 2) 2,538 ----------- Total assets 10,847,788 ----------- LIABILITIES: Accrued expenses 13,659 ----------- Total liabilities 13,659 ----------- NET ASSETS $10,834,129 =========== NET ASSETS CONSIST OF: Paid-in capital $15,960,806 Accumulated undistributed net investment income 432,639 Accumulated net realized loss (5,777,937) Net unrealized appreciation 218,621 ----------- $10,834,129 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $10,834,129 =========== SHARES OUTSTANDING: Class III 1,209,140 =========== NET ASSET VALUE PER SHARE: Class III $ 8.96 ===========
2 See accompanying notes to the financial statements. GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 271,970 Interest 619 ---------- Total income 272,589 ---------- EXPENSES: Audit fees 17,924 Custodian and transfer agent fees 2,187 Registration fees 1,989 Legal fees 279 Trustees fees (Note 2) 130 Miscellaneous 825 Fees waived or borne by Manager (Note 2) (23,334) ---------- Net expenses -- ---------- Net investment income 272,589 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (5,627,815) Realized gain distributions from investment company shares 559,160 ---------- Net realized loss (5,068,655) ---------- Change in net unrealized appreciation (depreciation) on investments 7,580,313 ---------- Net realized and unrealized gain 2,511,658 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,784,247 ==========
See accompanying notes to the financial statements. 3 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 272,589 $ 885,699 Net realized gain (loss) (5,068,655) 1,737,055 Change in net unrealized appreciation (depreciation) 7,580,313 (5,741,678) ----------- ------------ Net increase (decrease) in net assets from operations 2,784,247 (3,118,924) ----------- ------------ Distributions to shareholders from: Net investment income Class III -- (885,699) ----------- ------------ Total distributions from net investment income -- (885,699) ----------- ------------ In excess of net investment income Class III -- (1,377,961) ----------- ------------ Total distributions in excess of net investment income -- (1,377,961) ----------- ------------ Net realized gains Class III (1,505,715) (3,441,070) ----------- ------------ Total distributions from net realized gains (1,505,715) (3,441,070) ----------- ------------ (1,505,715) (5,704,730) ----------- ------------ Net share transactions: (Note 5) Class III (20,026,209) (12,546,195) ----------- ------------ Decrease in net assets resulting from net share transactions (20,026,209) (12,546,195) ----------- ------------ Total decrease in net assets (18,747,677) (21,369,849) NET ASSETS: Beginning of period 29,581,806 50,951,655 ----------- ------------ End of period (including accumulated undistributed net investment income of $432,639 and $0, respectively) $10,834,129 $ 29,581,806 =========== ============
4 See accompanying notes to the financial statements. GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------ 2000 1999 1998 1997* ------- ------- ------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.52 $ 10.39 $ 10.52 $ 10.07 ------- ------- ------- ------- Income from investment operations: Net investment income(a) 0.20+ 0.18+ 0.29+ 0.11 Net realized and unrealized gain (loss) 1.69 (0.82) 1.03 0.63 ------- ------- ------- ------- Total from investment operations 1.89 (0.64) 1.32 0.74 ------- ------- ------- ------- Less distributions to shareholders: From net investment income -- (0.18) (0.28) (0.11) In excess of net investment income -- (0.33) --(b) -- From net realized gains (1.45) (0.72) (1.17) (0.18) ------- ------- ------- ------- Total distributions (1.45) (1.23) (1.45) (0.29) ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 8.96 $ 8.52 $ 10.39 $ 10.52 ------- ------- ------- ------- ------- ------- ------- ------- TOTAL RETURN(c) 22.45% (6.67)% 13.56% 7.51%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $10,834 $29,582 $50,952 $36,746 Net expenses to average daily net assets(d) 0.00% 0.00% 0.00% 0.00%** Net investment income to average daily net assets(a) 2.24% 1.91% 2.65% 0.91%** Portfolio turnover rate 12% 17% 49% 31% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.02 $ 0.01 $ 0.01 $ 0.03
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. (b) The per share distribution in excess of net investment income was $0.0004. (c) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (d) Net expenses exclude expenses incurred indirectly through investment in underlying funds. (See Note 1.) + Computed using average shares outstanding throughout the period. * Period from October 22, 1996 (commencement of operations) to February 28, 1997. ** Annualized. ++ Not annualized. See accompanying notes to the financial statements. 5 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO World Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund operates as a "fund-of-funds" in that, pursuant to management provided by the Manager, it makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than the return of the GMO World Extended benchmark through investment to varying extents in other Funds of the Trust. The Fund will pursue its objective by investing in Class III shares of domestic equity, international equity, and fixed income funds of the Trust. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. 6 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to the classification of distributions received from underlying funds. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $160,050 $(172,951) $12,901
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for 7 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .66% of the amount invested. In the case of cash redemptions, the fee is .15% of the amount redeemed. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $3,734 in purchase premiums and $33,146 in redemption fees. There is no premium for reinvested distributions or in-kind transactions. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in the underlying funds, some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 8 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Manager determines the allocation of the assets of the Fund among designated underlying funds. The Manager does not charge an advisory fee for asset allocation advice provided to the Fund, but receives advisory and shareholder service fees from the underlying funds in which the Fund invests. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. No shareholder service fee is charged for Class III shares. GMO has contractually agreed to reimburse all expenses directly incurred by the Fund until June 30, 2000 (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses). The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $130. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $1,640,463 and $22,344,634, respectively. At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $11,021,209 $873,256 $(1,049,215) $(175,959)
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 99.9% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders could have a material effect. 9 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ------------------------ ------------------------ Shares Amount Shares Amount Class III: ---------- ------------ ---------- ------------ Shares sold 61,132 $ 565,696 497 $ 4,496 Shares issued to shareholders in reinvestment of distributions 170,716 1,505,715 535,862 4,995,646 Shares repurchased (2,495,019) (22,097,620) (1,968,349) (17,546,337) ---------- ------------ ---------- ------------ Net decrease (2,263,171) $(20,026,209) (1,431,990) $(12,546,195) ========== ============ ========== ============
10 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, the Fund has designated 100% of distributions as net capital gain dividends. At February 29, 2000 the Fund had a capital loss carryforward available to offset future capital gains, if any, of the following amount:
Year of Expiration Amount ------------------------------------------------------------ ---------- 2008 $5,383,357
11 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham and Mr. Ben Inker are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham has been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. Mr. Inker has been with the firm for eight years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO World Equity Allocation Fund returned 22.5% for the twelve months ended February 29, 2000. During that period the Fund's benchmark (GMO World Extended + Index) returned 20.2%. Our fundamental conclusion at the outset of 1999 was that the developed, large cap equity markets in the U.S. and abroad were markedly overvalued. Our research indicated that better long-term returns could be achieved from investments in other asset classes, including both REITs (Real Estate Investment Trusts) and small caps in the U.S., emerging and small cap international equities and fixed income instruments. By diversifying out of large cap equities and into other asset classes with good return potential, we believed we were exposing our clients to a portfolio with better return potential and a reasonable level of risk. For the period, our emerging equities and small cap growth outperformed the benchmark by large margins, while small cap value and REITs underperformed substantially. During the fiscal year, the Fund was underweight in U.S. stocks by 21% relative to the benchmark. This weighting was split between emerging equities, which outperformed the S&P 500 by 56%, and fixed income, which underperformed the S&P 500 by 10%. Within U.S. stocks, we tilted the portfolio towards the most attractively valued sectors including REITs, where we were 5% overweight. For the fiscal year, the allocation to REITs hurt performance, as the GMO REIT Fund underperformed the S&P 500 Index by 16%. Performance of the GMO Growth Fund was 33% above the S&P 500 and GMO Small Cap Growth was 56% above the S&P 500. However, this gain was partially offset by underperformance of the GMO Small Cap Value and Value Funds, which underperformed the S&P 500 by 1% and 20%, respectively. Performance of the International Core Fund lagged the benchmark substantially as the rally in expensive multinationals continued. The GMO International Core Fund returned 8%, underperforming the MSCI EAFE Index by 17%. The Fund was 14% overweight in emerging equities for the period, helping performance as both the GMO Emerging Markets Fund and the GMO Evolving Countries Fund outperformed the IFC Investable Composite by 9.5% and 31%, respectively. Collectively, the allocation to international equities added 1.5% to the Fund relative to the benchmark, with well more than 100% of this due to the overweight and strong implementation in emerging equities. The Fund was overweight 13% in fixed income, with allocations to international and emerging bonds along with U.S. fixed income. The drag on the portfolio due to the fixed income overweight was partially offset by the extremely strong performance (+46%) of emerging debt within the fixed income portfolio. GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- OUTLOOK The fundamentals of today's markets do not justify the extreme valuation disparities that we see. The investment climate has become astonishingly speculative, exemplified by the extraordinary returns of "new economy" stocks. Our conviction that these conditions cannot prevail indefinitely remains firm. As such, we will hold our positions, which remain remarkably cheap on a relative basis. With the eventual return to intrinsic value, we expect the opportunities for value-added resulting from these extreme conditions will be extraordinary with the good relative performance of the last year merely a small down payment. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO WORLD EQUITY ALLOCATION FUND CLASS III SHARES AND THE MSCI ALL COUNTRY WORLD INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 6/28/96 1yr 5yr 10yr (ITD)* 21.46 N/A 9.1
[GRAPH]
Date GMO World Equity Allocation Fund-III MSCI All Country World GMO World Extended + 6/28/96 9934 10000 10000 9/30/96 9884 10094 10171 12/31/96 10283 10510 10749 3/31/97 10435 10625 10935 6/30/97 11475 12212 12479 9/30/97 12137 12493 12981 12/31/97 11335 12051 12664 3/31/98 12683 13723 14490 6/30/98 11997 13810 14676 9/30/98 10188 12114 12834 12/31/98 11645 14669 15470 3/31/99 11724 15265 15972 6/30/99 13377 16167 16877 9/30/99 12975 15904 16656 12/31/99 14375 18674 19406 2/29/00 13770 17764 18470
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 66 bp on the purchase and 15 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. *Performance is linked to Class I shares (originating share class) and is converted to Class III shares on October 22, 1996 (commencement date of Class III shares). GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly in all material respects, the financial position of GMO Global (U.S.+) Equity Allocation Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MUTUAL FUNDS -- 100.0% 53,052 GMO Currency Hedged International Core Fund 532,646 194,970 GMO Emerging Country Debt Fund 1,704,041 211,855 GMO Emerging Markets Fund 2,364,306 238,601 GMO Evolving Countries Fund 2,722,433 57,182 GMO Growth Fund 283,049 144,718 GMO Inflation Indexed Bond Fund 1,406,661 232,393 GMO International Core Fund 4,859,342 34,353 GMO International Small Companies Fund 396,430 346,935 GMO REIT Fund 2,865,682 115,093 GMO Small Cap Growth Fund 1,941,623 234,993 GMO Small Cap Value Fund 2,916,264 130,088 GMO U.S. Bond/Global Alpha A Fund 1,254,044 729,397 GMO U.S. Core Fund 12,129,869 162,251 GMO Value Fund 1,294,760 ------------- TOTAL MUTUAL FUNDS (COST $39,441,842) 36,671,150 ------------- SHORT-TERM INVESTMENTS -- 0.0% REPURCHASE AGREEMENT -- 0.0% $ 8,423 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $8,424 and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest, of $8,591. 8,423 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $8,423) 8,423 ------------- TOTAL INVESTMENTS -- 100.0% (Cost $39,450,265) 36,679,573 Other Assets and Liabilities (net) -- (0.0%) (10,729) ------------- TOTAL NET ASSETS -- 100.0% $ 36,668,844 =============
See accompanying notes to the financial statements. 1 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $39,450,265) (Note 1) $36,679,573 Receivable for expenses waived or borne by Manager (Note 2) 3,521 ----------- Total assets 36,683,094 ----------- LIABILITIES: Accrued expenses 14,250 ----------- Total liabilities 14,250 ----------- NET ASSETS $36,668,844 =========== NET ASSETS CONSIST OF: Paid-in capital $39,039,144 Accumulated net realized gain 400,392 Net unrealized depreciation (2,770,692) ----------- $36,668,844 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $36,668,844 =========== SHARES OUTSTANDING: Class III 3,863,392 =========== NET ASSET VALUE PER SHARE: Class III $ 9.49 ===========
2 See accompanying notes to the financial statements. GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 938,133 Interest 690 ---------- Total income 938,823 ---------- EXPENSES: Audit fees 17,376 Custodian and transfer agent fees 9,180 Registration fees 1,989 Legal fees 825 Trustees fees (Note 2) 376 Miscellaneous 1,189 Fees waived or borne by Manager (Note 2) (30,935) ---------- Net expenses -- ---------- Net investment income 938,823 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (640,925) Realized gain distributions from investment company shares 3,318,792 ---------- Net realized gain 2,677,867 ---------- Change in net unrealized appreciation (depreciation) on investments 2,595,656 ---------- Net realized and unrealized gain 5,273,523 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,212,346 ==========
See accompanying notes to the financial statements. 3 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 938,823 $ 697,497 Net realized gain 2,677,867 3,942,235 Change in net unrealized appreciation (depreciation) 2,595,656 (6,146,786) ----------- ------------ Net increase (decrease) in net assets from operations 6,212,346 (1,507,054) ----------- ------------ Distributions to shareholders from: Net investment income Class III (938,823) (697,497) ----------- ------------ Total distributions from net investment income (938,823) (697,497) ----------- ------------ In excess of net investment income Class III (709,581) (1,211,441) ----------- ------------ Total distributions in excess of net investment income (709,581) (1,211,441) ----------- ------------ Net realized gains Class III (2,295,053) (3,274,986) ----------- ------------ Total distributions from net realized gains (2,295,053) (3,274,986) ----------- ------------ (3,943,457) (5,183,924) ----------- ------------ Net share transactions: (Note 5) Class III 1,926,347 (5,936,414) ----------- ------------ Increase (decrease) in net assets resulting from net share transactions 1,926,347 (5,936,414) ----------- ------------ Total increase (decrease) in net assets 4,195,236 (12,627,392) NET ASSETS: Beginning of period 32,473,608 45,101,000 ----------- ------------ End of period (including accumulated undistributed net investment income of $0 and $0, respectively) $36,668,844 $ 32,473,608 =========== ============
4 See accompanying notes to the financial statements. GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------ 2000 1999 1998 1997* ------- ------- ------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.85 $ 10.48 $ 10.30 $ 10.00 ------- ------- ------- ------- Income from investment operations: Net investment income(a) 0.25 0.16+ 0.26+ 0.12 Net realized and unrealized gain (loss) 1.45 (0.40) 1.83 0.38 ------- ------- ------- ------- Total from investment operations 1.70 (0.24) 2.09 0.50 ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.24) (0.16) (0.26) (0.12) In excess of net investment income (0.19) (0.40) --(c) -- From net realized gains (0.63) (0.83) (1.65) (0.08) ------- ------- ------- ------- Total distributions (1.06) (1.39) (1.91) (0.20) ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.49 $ 8.85 $ 10.48 $ 10.30 ======= ======= ======= ======= TOTAL RETURN(b) 19.14% (2.84)% 21.86% 5.09%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $36,669 $32,474 $45,101 $30,787 Net expenses to average daily net assets(d) 0.00% 0.00% 0.00% 0.00%** Net investment income to average daily net assets(a) 2.63% 1.64% 2.39% 3.21%** Portfolio turnover rate 18% 34% 32% 10% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.01 $ 0.01 $ 0.01
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. (b) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (c) The per share distribution in excess of net investment income was $0.0009. (d) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 1. * Period from November 26, 1996 (commencement of operations) to February 28, 1997. ** Annualized. + Computed using average shares outstanding throughout the period. ++ Not annualized. See accompanying notes to the financial statements. 5 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Global (U.S.+) Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund operates as a "fund-of-funds" in that, pursuant to management provided by the Manager, it makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than that of the GMO Global (U.S.+) Equity Index, a benchmark developed by the Manager. The Fund will pursue its objective by investing in Class III shares of domestic equity, international equity, and fixed income funds of the Trust. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. 6 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to the classification of distributions received from underlying funds. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $709,581 $(732,518) $22,937
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. 7 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the fund will also incur fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .47% of the amount invested. In the case of cash redemptions, the fee is .15% of the amount redeemed. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $15,897 in purchase premiums and $3,005 in redemption fees. There is no premium for reinvested distributions or in-kind transactions. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in the underlying funds, some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Manager determines the allocation of the assets of the Fund among designated underlying funds. The Manager does not charge an advisory fee for asset allocation advice provided to the Fund, but receives advisory and shareholder service fees from the underlying funds in which the Fund invests. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. No shareholder service fee is charged for Class III shares. GMO has contractually agreed to reimburse all expenses directly incurred by the Fund until June 30, 2000 (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses). 8 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $376. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $8,577,426 and $6,336,783, respectively. At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $40,630,737 $1,506,040 $(5,457,204) $(3,951,164)
4. PRINCIPAL SHAREHOLDER At February 29, 2000, 81.8% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder could have a material effect. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 --------------------- ------------------------ Shares Amount Shares Amount Class III: -------- ----------- ---------- ------------ Shares sold 346,147 $ 3,382,445 531,374 $ 5,481,883 Shares issued to shareholders in reinvestment of distributions 71,629 699,986 136,208 1,323,898 Shares repurchased (224,862) (2,156,084) (1,298,592) (12,742,195) -------- ----------- ---------- ------------ Net increase (decrease) 192,914 $ 1,926,347 (631,010) $ (5,936,414) ======== =========== ========== ============
9 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 58.2% of distributions as net capital gain dividends. 10 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham and Mr. Ben Inker are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham has been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. Mr. Inker has been with the firm for eight years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the Global (U.S.+) Equity Allocation Fund returned 19.1% for the fiscal year ended February 29, 2000. During that period the Fund's benchmark (75% S&P 500/25% GMO EAFE Extended) returned 15.2%. Our fundamental conclusion at the outset of 1999 was that the developed, large cap equity markets in the U.S. and abroad were markedly overvalued. Our research indicated that better long-term returns could be achieved from investments in other asset classes, including both REITs (Real Estate Investment Trusts) and small caps in the U.S., emerging and small cap international equities and fixed income instruments. By diversifying out of large cap equities and into other asset classes with good return potential, we believed we were exposing our clients to a portfolio with better return potential and a reasonable level of risk. For the period, our emerging equities and small cap growth outperformed the benchmark by large margins, while small cap value and REITs underperformed substantially. During the fiscal year, the Fund was underweight in U.S. stocks by 18% relative to the benchmark. This weighting was split between emerging equities, which outperformed the S&P 500 by 56%, and fixed income, which underperformed the S&P 500 by 10%. Within U.S. stocks, we tilted the portfolio towards the most attractively valued sectors including REITs, where we were 7% overweight. For the fiscal year, the allocation to REITs hurt performance, as the GMO REIT Fund underperformed the S&P 500 Index by 16%. Performance of the GMO Growth Fund was 33% above the S&P 500 and GMO Small Cap Growth was 56% above the S&P 500. However, this gain was partially offset by underperformance of the GMO Small Cap Value and Value Funds, which underperformed the S&P 500 by 1% and 20%, respectively. Performance of the International Core Fund lagged the benchmark substantially as the rally in expensive multinationals continued. The GMO International Core Fund returned 8%, underperforming the MSCI EAFE Index by 17%. The Fund was 10% overweight in emerging equities for the period, helping performance as both the GMO Emerging Markets Fund and the GMO Evolving Countries Fund outperformed the IFC Investable Composite by 9.5% and 31%, respectively. Collectively, the allocation to international equities added 2.6% to the Fund relative to the benchmark, with well more than 100% of this due to the overweight and strong implementation in emerging equities. The Fund was overweight 12% in fixed income, with allocations to international and emerging bonds along with U.S. fixed income. The drag on the portfolio due to the fixed income overweight was partially offset by the extremely strong performance (+46%) of emerging debt within the fixed income portfolio. GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- OUTLOOK The fundamentals of today's markets do not justify the extreme valuation disparities that we see. The investment climate has become astonishingly speculative, exemplified by the extraordinary returns of 'new economy' stocks. Our conviction that these conditions cannot prevail indefinitely remains firm. As such, we will hold our positions, which remain remarkably cheap on a relative basis. With the eventual return to intrinsic value, we expect the opportunities for value-added resulting from these extreme conditions will be extraordinary with the good relative performance of the last year merely a small down payment. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND CLASS III SHARES AND THE S&P 500 INDEX (50%)/MSCI ALL COUNTRY WORLD INDEX (50%) AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 11/26/96 1yr 5yr 10yr (ITD) 18.4 N/A 12.62
[GRAPH]
Date GMO Global (US+) Equity Allocation Fund-III 50% S&P 500/50% MSCI All Country World GMO Global Equity Index 11/26/96 9953 10000 10000 12/31/96 10023 9823 9848 3/31/97 10185 10011 10079 6/30/97 11394 11634 11693 9/30/97 12412 12201 12374 12/31/97 12017 12157 12395 3/31/98 13317 13848 14154 6/30/98 12892 14121 14488 9/30/98 11149 12553 12882 12/31/98 12734 15214 15574 3/31/99 12804 15903 16192 6/30/99 14357 16933 17194 9/30/99 13629 16264 16526 12/31/99 15190 18891 19095 2/29/00 14732 17787 17949
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 47 bp on the purchase and 15 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Small Cap Growth Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- COMMON STOCKS -- 98.9% ADVERTISING -- 0.6% 15,300 e4L Inc* 34,425 6,600 Source Media Inc* 98,175 4,700 TMP Worldwide Inc* 638,906 ------------- 771,506 ------------- AUTOMOTIVE -- 0.4% 8,800 Copart Inc* 185,075 10,200 Exide Corp 103,275 10,200 Meritor Automotive Inc 142,800 6,250 Monaco Coach Corp* 112,500 3,700 National R.V. Holdings Inc* 48,100 ------------- 591,750 ------------- BANKING AND FINANCIAL SERVICES -- 1.8% 6,100 Advanta Corp, Class A 113,612 1,200 Bancfirst Corp 33,300 3,800 Bank United Corp 99,512 8,700 Comdisco Inc 334,406 182 Commerce Bancorp Inc 6,120 3,300 Commonwealth Bancorp Inc 51,769 9,400 Dime Bancorp Inc 114,562 6,200 Dime Community Bancshares 91,837 4,100 Eaton Vance Corp 169,894 2,500 Financial Security Assurance Holdings Ltd 112,500 33,400 FiNet.com Inc* 45,925 7,300 First Federal Financial Corp* 93,075 1,500 GBC Bancorp (California) 40,500 3,500 Medallion Financial Corp 63,875 7,966 Metris Companies Inc 206,120 5,500 OceanFirst Financial Corp 87,656 105 Old National Bancorp 2,625 5,200 PFF Bancorp Inc 78,650 3,300 Pioneer Group* 66,206 4,850 Queens County Bancorp Inc 92,150 4,500 Ryland Group Inc 79,875 4,000 SEI Investments Co 357,250
See accompanying notes to the financial statements. 1 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- BANKING AND FINANCIAL SERVICES -- CONTINUED 6,100 SierraCities.com Inc* 128,862 ------------- 2,470,281 ------------- CHEMICALS -- 0.4% 5,100 Geon Co 106,462 13,000 Lubrizol Corp 322,562 6,500 W.R. Grace & Co* 65,406 ------------- 494,430 ------------- COMMUNICATIONS -- 0.8% 4,800 Aerial Communications Inc* 287,700 700 Ancor Communications Inc* 41,912 8,966 Per-Se Technologies Inc* 70,607 2,200 Powerwave Technologies Inc* 351,725 5,800 ZixIt Corp* 311,932 ------------- 1,063,876 ------------- COMPUTER AND OFFICE EQUIPMENT -- 5.6% 8,200 Advanced Micro Devices Inc* 320,825 15,200 Auspex Systems Inc* 196,650 5,100 CDW Computer Centers Inc* 279,862 10,800 Emulex Corp* 1,728,000 10,000 Infocus Systems Inc* 335,000 12,400 MTI Technology Corp* 650,225 18,600 Rational Software Corp* 1,322,925 4,800 Safeguard Scientifics Inc* 839,700 6,000 Sandisk Corp* 534,000 9,400 Symbol Technologies Inc 894,175 3,400 Visual Networks Inc* 223,550 8,700 Xircom Inc* 361,322 900 Zebra Technologies Corp* 59,906 ------------- 7,746,140 ------------- CONSTRUCTION -- 0.7% 3,000 Centex Construction Products Inc 69,750 1,100 Centex Corp 21,656 14,600 Horton (DR) Inc 164,250 6,200 Insituform Technologies Inc, Class A* 175,150
2 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSTRUCTION -- CONTINUED 5,600 MDC Holdings Inc 85,050 2,900 NVR Inc* 127,962 10,300 Pulte Corp 173,169 8,100 Standard Pacific Corp 86,062 ------------- 903,049 ------------- CONSUMER GOODS -- 2.5% 4,600 Brown Shoe Co Inc 48,300 9,500 Callaway Golf Co 114,000 9,200 Church & Dwight Co Inc 156,975 15,000 Cytyc Corp* 690,000 9,100 Donna Karan International Inc* 65,406 6,650 Fossil Inc* 150,872 8,700 Furniture Brands International Inc* 139,744 7,300 Genesco Inc* 74,825 3,100 Guess ? Inc* 66,069 5,200 Insight Enterprises Inc* 163,150 5,500 Jakks Pacific Inc* 90,750 18,300 Jones Apparel Group Inc* 414,037 3,600 K-Swiss Inc, Class A 40,050 8,200 La-Z-Boy Chair Co 136,325 2,700 Oneida Ltd 47,925 6,000 Patterson Dental Company* 216,188 8,300 Pinnacle Systems Inc* 416,037 5,550 Quiksilver Inc* 71,456 3,300 Salton Inc* 155,512 3,500 SCP Pool Corp* 86,844 7,150 THQ Inc* 144,341 ------------- 3,488,806 ------------- ELECTRONIC EQUIPMENT -- 24.4% 32,200 Adaptec Inc* 1,320,200 4,800 Alpha Industries Inc* 696,900 7,900 American Power Conversion Corp* 268,106 7,900 Antec Corp* 418,206 4,000 Applied Micro Circuits Corp* 1,100,250 37,200 Atmel Corp* 1,841,400 4,900 Atmi Inc* 231,219 4,800 AVX Corp 304,800
See accompanying notes to the financial statements. 3 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- ELECTRONIC EQUIPMENT -- CONTINUED 12,400 C-Cube Microsystems Inc* 1,156,300 5,100 Concord Communications Inc* 228,225 5,900 Conexant Systems Inc* 579,675 7,400 CTS Corp 477,300 28,300 Cypress Semiconductor Corp* 1,291,187 22,000 Digital Microwave Corp* 734,250 6,600 DII Group Inc* 638,137 5,400 Electro Scientific Industries* 306,112 370 eMerge Interactive Inc, Class A* 19,656 4,500 Hadco Corp* 249,187 4,600 Harmonic Lightwaves Inc* 629,912 28,600 Integrated Device Technology Inc* 1,054,625 17,000 Interdigital Communications Corp* 542,937 17,900 International Rectifier Corp* 749,562 10,800 Kemet Corp* 663,525 7,700 Kent Electronics Corp* 260,837 24,700 Komag Inc* 54,804 8,200 MEMC Electronic Materials Inc* 142,987 17,550 Microchip Technology Inc* 1,095,778 20,800 National Semiconductor Corp* 1,562,600 29,600 P-Com Inc* 540,200 20,600 Picturetel Corp* 155,787 28,600 PMC-Sierra Inc* 5,521,587 4,500 Polycom Inc* 523,406 5,700 Powertel Inc* 533,662 12,400 QLogic Corp* 1,934,400 14,500 Scientific Atlanta Inc 1,488,969 3,600 SDL Inc* 1,476,000 8,200 Semtech Corp* 512,500 19,000 Sensormatic Electronics Corp* 361,000 10,800 Silicon Valley Group Inc* 273,375 1,500 Texas Instruments Inc 249,750 1,800 Titan Corp* 67,500 3,750 Transwitch Corp* 440,625 2,800 TriQuint Semiconductor Inc* 332,500 4,700 Vicor Corp* 106,925 10,700 Westell Technologies Inc* 366,475 ------------- 33,503,338 -------------
See accompanying notes to the financial statements. 4 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FOOD AND BEVERAGE -- 0.5% 3,700 Agribrands International Inc* 135,281 6,900 Coors (Adolph) Co, Class B 302,737 13,000 IBP Inc 162,500 10,100 Topp Inc (The)* 75,750 ------------- 676,268 ------------- HEALTH CARE -- 4.5% 22,700 Apria Healthcare Group* 323,475 4,700 Bard (CR) 185,650 8,566 Bindley Western Industries Inc 147,228 1,400 Celera Genomics Group* 341,600 8,500 Chiron Corp* 425,000 14,300 Columbia Laboratories Inc* 180,537 3,000 Cooper (The) Companies Inc 82,312 6,100 Enzon Inc* 353,800 4,300 Express Scripts Inc, Class A* 198,069 7,000 Hooper Holmes Inc 215,250 36,100 Laboratory Corporation of America Holdings* 144,400 5,600 Lincare Holdings Inc* 131,250 9,390 Medimmune Inc* 1,863,915 14,700 Medquist Inc* 378,525 7,500 Mid Atlantic Medical Services Inc* 61,406 7,500 Renal Care Group Inc* 131,719 4,100 ResMed Inc* 305,962 23,900 Summit Technology Inc* 179,250 2,300 Techne Corp* 197,297 20,000 Visx Inc* 338,750 ------------- 6,185,395 ------------- INSURANCE -- 0.5% 2,700 E. W. Blanch Holdings Inc 126,900 2,415 Medical Assurance Inc* 47,394 32,400 Oxford Health Plans Inc* 500,175 2,200 Risk Capital Holdings Inc* 33,550 ------------- 708,019 ------------- LODGING -- 0.2% 11,800 Boyd Gaming Corp* 61,212 8,000 MGM Grand Inc 159,000
See accompanying notes to the financial statements. 5 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- LODGING -- CONTINUED 2,000 Trendwest Resorts Inc* 48,750 ------------- 268,962 ------------- MACHINERY -- 4.0% 6,300 American Standard Co* 219,712 4,500 Astec Industries* 119,812 10,800 Asyst Technologies Inc* 495,450 6,900 Briggs & Stratton Corp 230,719 5,200 Cummins Engine Inc 173,225 4,400 Donaldson Co Inc 100,100 12,675 Dycom Industries Inc* 633,750 11,500 Helix Technology Corp 817,937 8,200 Kulicke & Soffa Industries* 651,900 9,300 Lam Research Corp* 1,451,962 1,200 Novellus System Inc* 71,175 8,300 Pall Corp 163,925 4,400 Scott Technologies Inc* 84,700 7,600 Terex Corp* 90,250 3,000 Toro Co 99,375 6,300 Ultratech Stepper Inc* 110,250 2,100 Woodward Governor Co 48,300 ------------- 5,562,542 ------------- MANUFACTURING -- 1.3% 5,200 Cymer Inc* 285,350 15,300 Gentex Corp* 447,048 3,700 Maverick Tube Corp* 83,250 4,500 PRI Automation Inc* 359,437 6,600 Temple Inland Inc 337,425 7,300 Tower Automotive Inc* 86,687 2,600 Zomax Inc* 127,237 ------------- 1,726,434 ------------- METALS AND MINING -- 0.2% 4,900 Amcol International Corp 77,175 1,860 Phelps Dodge Corp 87,652 900 Reynolds Metals Co 57,150 ------------- 221,977 -------------
See accompanying notes to the financial statements. 6 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- OIL AND GAS -- 2.8% 3,100 Barrett Resources Corp* 90,287 2,000 Berry Petroleum Co, Class A 35,750 6,200 Brown Tom Inc* 82,150 41,600 Chesapeake Energy Corp* 122,200 12,200 Cross Timbers Oil Co 105,225 20,100 EEX Corp* 48,994 11,200 Ensco International Inc 338,800 3,000 Equitable Resources Inc 113,250 6,900 Forest Oil Corp* 56,494 66,500 Grey Wolf Inc* 232,750 4,200 Houston Exploration Co* 63,787 4,100 HS Resources Inc* 67,650 5,400 Louis Dreyfus Natural Gas* 111,375 17,400 Marine Drilling Co Inc* 396,937 11,600 Meridian Resource Corp* 39,875 4,700 Mitchell Energy, Class B 98,994 4,400 Newfield Exploration Co* 136,400 5,800 Nuevo Energy Co* 102,950 21,200 Ocean Energy Inc* 226,575 10,700 Patterson Energy Inc* 244,094 19,700 Pioneer Natural Resources Co* 163,756 3,100 Plains Resource Inc* 43,012 9,700 Pogo Producing Co 224,312 10,300 Santa Fe Snyder Corp* 77,250 2,800 St. Mary Land & Exploration Co 77,875 5,500 Stone Energy Corp* 223,437 11,400 Union Pacific Resources Group 101,887 3,400 UTI Energy Corp* 109,012 11,700 Vintage Petroleum Inc 169,650 ------------- 3,904,728 ------------- PAPER AND ALLIED PRODUCTS -- 0.7% 6,200 Boise Cascade Corp 184,837 17,600 EarthShell Corp* 106,700 20,000 Gaylord Container Corp, Class A* 107,500 11,400 Longview Fibre Co 155,325 5,300 Mead Corp 158,669 9,000 United Stationers Inc* 241,875 ------------- 954,906 -------------
See accompanying notes to the financial statements. 7 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- PHARMACEUTICALS -- 3.0% 3,700 Algos Pharmaceuticals Corp* 73,769 3,400 Andrx Corp* 326,612 4,600 Coulter Pharmaceutical Inc* 178,250 4,600 Cygnus Inc* 84,812 1,100 Gilead Sciences Inc* 84,150 10,500 IDEC Pharmaceuticals Corp* 1,479,187 32,700 Ivax Corp* 743,925 13,600 Ligand Pharmaceuticals Inc, Class B* 295,800 16,600 Liposome Company Inc* 223,062 7,900 Millipore Corp 422,156 8,800 Triangle Pharmaceuticals Inc* 201,300 ------------- 4,113,023 ------------- PRIMARY MATERIALS -- 0.3% 3,975 Elcor Corp 133,162 9,200 USG Corp 299,000 ------------- 432,162 ------------- PRIMARY PROCESSING -- 0.3% 5,500 Belden Inc 124,438 6,700 Commscope Inc* 260,881 ------------- 385,319 ------------- PRINTING AND PUBLISHING -- 0.7% 2,000 Central Newspapers Inc, Class A 57,125 6,300 Harland (JH) Co 97,256 4,300 Houghton Mifflin Co 171,194 2,600 McClatchy Newspapers Inc 89,863 2,600 Playboy Enterprises Inc, Class B* 57,363 4,000 TV Guide Inc, Class A* 188,500 10,600 Valassis Communications Inc* 293,488 ------------- 954,789 ------------- REAL ESTATE -- 0.1% 3,400 CN Fairfield Communities Inc* 29,963 3,300 Town & Country Trust 57,956 ------------- 87,919 -------------
See accompanying notes to the financial statements. 8 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- REFINING -- 0.1% 2,800 Murphy Oil Corp 141,750 ------------- RETAIL TRADE -- 4.7% 17,400 7 Eleven Inc* 45,132 10,900 American Eagle Outfitters Inc* 277,950 6,400 Ames Department Stores Inc* 90,400 5,600 AnnTaylor Stores Corp* 106,750 11,700 Brinker International Inc* 254,475 8,900 Cato Corp, Class A 89,000 10,450 CEC Entertainment Inc* 237,738 34,100 Charming Shoppes Inc* 204,600 6,600 Chicos Fas Inc* 83,325 7,600 Children's Place Retail Stores Inc* 89,775 11,750 Cost Plus Inc* 218,109 4,900 CSK Auto Corp* 56,350 2,800 Cyberian Outpost Inc* 24,675 11,800 Darden Restaurants Inc 155,613 8,125 Dollar Tree Stores Inc* 315,352 5,300 Factory 2-U Stores Inc* 128,525 4,900 Haverty Furniture Companies Inc 52,981 12,100 Jack in the Box Inc* 242,756 3,000 Lands End Inc* 99,563 7,600 Linens N Things Inc* 149,625 10,900 Musicland Stores Corp* 74,256 1,700 NPC International Inc* 14,025 8,600 Outback Steakhouse Inc* 224,675 11,600 Pacific Sunwear of California* 295,075 4,700 Papa Johns International Inc* 112,800 8,600 Petco Animal Supplies Inc* 92,450 2,100 Rare Hospitality International Inc* 39,638 21,100 Ross Stores Inc 305,950 15,500 Spiegel Inc, Class A* 111,406 20,800 Sunglass Hut Inc* 178,100 6,100 Talbots Inc 220,744 6,200 The Cheesecake Factory Inc* 184,450 2,600 The Mens Wearhouse Inc* 60,369 15,800 Tiffany & Co 1,014,163 10,000 Valuevision International Inc, Class A* 500,000
See accompanying notes to the financial statements. 9 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- RETAIL TRADE -- CONTINUED 5,600 Williams-Sonoma Inc* 173,250 ------------- 6,524,045 ------------- SERVICES -- 8.5% 3,800 Advo Inc* 105,450 26,300 AMF Bowling Inc* 85,475 6,800 Argosy Gaming Co* 76,925 1,500 autobytel.com Inc* 16,031 17,200 Aztar Corp* 163,400 5,300 Bally Total Fitness Holdings Corp* 142,438 2,500 Career Education Corp* 93,750 92,100 Caremax Rx Inc* 414,450 4,100 Catalina Marketing Corp* 349,013 16,000 Cephalon Inc* 1,063,501 2,300 Championship Auto Racing Teams, Inc* 46,000 9,200 COR Therapeutics Inc* 824,550 8,600 Dollar Thrifty Automotive Group Inc* 112,875 9,200 Education Management Corp* 119,600 11,000 Hollywood Entertainment Corp* 112,063 5,900 Icos Corp* 309,013 9,700 IT Group Inc* 73,963 2,600 Korn/Ferry International* 97,500 7,100 Mandalay Resort Group* 99,844 2,700 Millennium Pharmaceuticals Inc* 702,338 2,800 Modis Professional Services Inc* 44,100 9,900 Navigant Consulting Inc* 95,288 4,600 NCO Group Inc* 107,525 4,500 ON Assignment Inc* 168,188 5,900 Pegasystems Inc* 138,650 7,000 Players International Inc* 57,532 10,700 Rare Medium Group Inc* 642,000 22,200 Sitel Corp* 191,475 4,700 Sonic Corp* 113,975 1,900 Speedway Motorsports Inc* 58,188 11,700 Station Casinos Inc* 229,613 31,000 UnitedGlobal.Com Inc, Class A* 3,239,500 5,000 VeriSign Inc* 1,265,000 5,000 Whittman-Hart Inc* 226,875
10 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- SERVICES -- CONTINUED 12,200 WMS Industries Inc* 138,775 ------------- 11,724,863 ------------- TECHNOLOGY -- 21.6% 800 About.com Inc* 56,200 3,800 Advanced Digital Information Corp* 344,375 3,700 Advanced Energy Industries Inc* 269,175 1,800 Advent Software Inc* 163,238 7,000 American Management Systems Inc* 222,688 3,000 Aspect Development Inc* 446,625 6,600 AVT Corp* 174,488 10,000 BEA Systems Inc* 1,265,625 5,600 Bisys Group Inc* 288,750 6,200 BroadVision Inc* 1,565,888 2,700 Cabletron Systems Inc* 132,300 5,400 Clarify Inc* 779,288 157 CMG Information Services Inc* 20,341 9,200 Cognex Corp* 404,225 5,200 Cohu Inc 293,150 6,800 Credence Systems Corp* 906,100 4,100 CSG Systems International Inc* 210,638 9,800 Cybercash Inc* 102,900 12,600 Data Broadcasting Corp* 124,425 10,700 Dendrite International Inc* 263,488 5,800 Dionex Corp* 183,063 3,700 DST Systems Inc* 207,663 1,615 EarthLink Inc* 40,173 5,500 Electroglas Inc* 213,125 3,600 Electronic Arts Inc* 360,000 13,400 Electronics For Imaging Inc* 795,625 2,100 Exodus Communications Inc* 298,988 3,000 Factset Research Systems Inc 90,375 9,400 FileNet Corp* 402,438 1,000 Go2Net Inc* 87,000 1,900 Great Plains Software Inc* 132,169 8,200 Harbinger Corp* 262,913 1,600 i2 Technologies Inc* 261,600 17,800 Informix Corp* 284,800 1,700 ISS Group Inc* 178,500 7,424 JDS Uniphase Corp* 1,957,152
See accompanying notes to the financial statements. 11 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 3,300 Kronos Inc* 209,550 11,700 Legato Systems Inc* 416,813 9,700 LTX Corp* 409,219 2,400 Macromedia Inc* 207,450 2,300 Manugistics Group Inc* 130,669 5,700 Mercury Computer Systems Inc* 274,669 28,200 Mercury Interactive Corp* 2,717,776 5,000 Micromuse Inc* 709,063 4,000 MicroStrategy Inc* 556,250 9,500 Midway Games Inc* 140,719 8,000 National Computer System Inc 318,000 13,200 Network Appliance Inc* 2,491,500 9,300 Network Associates Inc* 283,069 1,400 Network Solutions Inc* 451,413 6,100 Nvidia Corp* 390,400 6,900 Open Market Inc* 345,863 5,400 Progress Software Corp* 134,663 5,000 Psinet Inc* 231,875 1,200 QRS Corp* 113,250 4,700 Radiant Systems Inc* 240,288 2,150 Radisys Corp* 105,350 12,200 Remedy Corp* 691,588 10,800 RSA Security Inc* 722,925 23,400 S3 Inc* 372,938 4,000 Sanchez Computer Associates Inc* 194,000 34,800 Sybase Inc* 872,175 7,800 Symantec Co* 557,213 7,000 Synopsys Inc* 279,563 16,800 USWeb Corp* 653,100 4,500 Verity Inc* 240,188 700 Vignette Corp* 161,350 2,700 Waters Corp* 264,769 ------------- 29,677,149 ------------- TELECOMMUNICATIONS -- 4.9% 9,600 American Mobile Satellite Corp* 278,400 6,300 Aspect Communications Corp* 405,956 16,800 Brightpoint Inc* 216,300 1,900 Carrier Access Corp* 107,825 37,500 Centennial Cellular Corp, Class A* 910,549
12 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- TELECOMMUNICATIONS -- CONTINUED 2,600 Commonwealth Telephone Enterprises Inc* 113,425 3,100 Cumulus Media Inc* 92,613 400 Entercom Communications Corp* 16,825 3,900 Hispanic Broadcasting Corp* 364,406 6,500 Liberty Digital Inc, Class A* 356,688 2,100 McLeodUSA Inc* 184,800 1,100 Metricom Inc* 85,663 1,400 MRV Communications Inc* 219,538 7,700 Pacific Gateway Exchange Inc* 155,925 58,600 Paging Network Inc* 170,309 7,100 Pinnacle Entertainment Inc* 122,475 9,000 Price Communications Corp* 214,875 900 RF Micro Devices Inc* 124,481 18,400 Talk Com Inc* 310,500 8,100 Telephone and Data Systems Inc 854,550 3,508 Voicestream Wireless Corp* 466,783 13,500 WebLink Wireless Inc* 243,000 9,800 Western Wireless Corp, Class A* 475,300 2,400 Winstar Communications Inc* 185,700 ------------- 6,676,886 ------------- TEXTILES -- 0.3% 34,300 Shaw Industries Inc 435,181 ------------- TOBACCO -- 0.0% 3,530 Brooke Group Ltd 46,773 ------------- TRANSPORTATION -- 0.9% 29,700 Airtran Holdings Inc* 121,586 9,600 American Freightways Corp* 104,400 3,700 Landstar System Inc* 207,894 3,100 M.S. Carriers Inc* 68,588 9,500 Mesa Airline Group Inc* 56,406 4,800 Mesaba Holdings Inc* 54,900 2,600 Midwest Express Holdings Inc* 67,113 5,300 Newport News Shipbuilding Inc 150,056 5,100 Roadway Express Inc 105,188 6,700 Skywest Inc 198,906 3,600 US Freightways Corp 119,700 ------------- 1,254,737 -------------
See accompanying notes to the financial statements. 13 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- UTILITIES -- 1.6% 12,100 Calpine Corp* 1,107,150 3,588 Dynegy Inc 168,188 19,300 Energy East Corp 405,300 9,400 Northeast Utilities 176,838 600 Potomac Electric Power Co 12,188 8,000 Southwest Natural Gas Corp 148,000 6,400 Southwestern Energy Co 44,800 6,700 Western Gas Resources Inc 92,125 ------------- 2,154,589 ------------- TOTAL COMMON STOCKS (COST $84,470,442) 135,851,592 ------------- SHORT-TERM INVESTMENTS -- 10.2% CASH EQUIVALENTS -- 8.9% $ 3,807,369 BankBoston Eurodollar Time Deposit, 6.1175%, due 4/28/00(a) 3,807,369 $ 918,915 First Union National Bank Time Deposit, 5.8125%, due 3/01/00(a) 918,915 $ 1,378,371 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(a) 1,378,371 1,610,799 Merrimac Cash Fund Premium Class(a) 1,610,799 $ 4,500,000 Prudential Securities Group, Inc. Master Note, 6.1875%, due 3/10/00(a) 4,500,000 ------------- 12,215,454 ------------- U.S. GOVERNMENT -- 0.7% $ 1,000,000 U.S. Treasury Bill, 5.689%, due 6/29/00(b) 981,300 -------------
See accompanying notes to the financial statements. 14 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 0.6% $ 782,935 Salomon Smith Barney, Inc. Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $783,042 and an effective yield of 4.95%, collaterized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest, of $798,594. 782,935 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $13,980,189) 13,979,689 ------------- TOTAL INVESTMENTS -- 109.1% (Cost $98,450,631) 149,831,281 Other Assets and Liabilities (net) -- (9.1%) (12,541,472) ------------- TOTAL NET ASSETS -- 100.0% $ 137,289,809 ============= NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Represents investments of security lending collateral (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). See accompanying notes to the financial statements. 15 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $98,450,631) (Note 1) $149,831,281 Receivable for investments sold 213,716 Dividends and interest receivable 33,672 Receivable for variation margin on open futures contracts (Notes 1 and 6) 60,750 Receivable for expenses waived or borne by Manager (Note 2) 13,399 ------------ Total assets 150,152,818 ------------ LIABILITIES: Payable upon return of securities loaned (Note 1) 12,215,454 Payable for Fund shares repurchased 552,623 Payable to affiliate for (Note 2): Management fee 32,702 Shareholder service fee 14,870 Accrued expenses 47,360 ------------ Total liabilities 12,863,009 ------------ NET ASSETS $137,289,809 ============ NET ASSETS CONSIST OF: Paid-in capital $ 78,147,374 Accumulated undistributed net realized gain 7,461,400 Net unrealized appreciation 51,681,035 ------------ $137,289,809 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $137,289,809 ============ SHARES OUTSTANDING: Class III 8,138,248 ============ NET ASSET VALUE PER SHARE: Class III $ 16.87 ============
16 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $135) $ 425,232 Interest (including securities lending income of $63,677) 318,817 ----------- Total income 744,049 ----------- EXPENSES: Management fee (Note 2) 430,598 Custodian and transfer agent fees 98,648 Audit fees 35,211 Legal fees 2,418 Registration fees 2,045 Trustees fees (Note 2) 1,316 Miscellaneous 2,839 Fees waived or borne by Manager (Note 2) (142,477) ----------- 430,598 Shareholder service fee (Note 2) Class III 195,726 ----------- Net expenses 626,324 ----------- Net investment income 117,725 ----------- REALIZED AND UNREALIZED GAIN: Net realized gain on: Investments 17,159,965 Closed futures contracts 734,429 ----------- Net realized gain 17,894,394 ----------- Change in net unrealized appreciation (depreciation) on: Investments 46,528,581 Open futures contracts 315,245 ----------- Net unrealized gain 46,843,826 ----------- Net realized and unrealized gain 64,738,220 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $64,855,945 ===========
See accompanying notes to the financial statements. 17 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 117,725 $ 644,666 Net realized gain 17,894,394 10,411,205 Change in net unrealized appreciation (depreciation) 46,843,826 (29,532,766) ------------ ------------ Net increase (decrease) in net assets from operations 64,855,945 (18,476,895) ------------ ------------ Distributions to shareholders from: Net investment income Class III (266,924) (535,430) ------------ ------------ Total distributions from net investment income (266,924) (535,430) ------------ ------------ Net realized gains Class III (9,060,286) (10,987,255) ------------ ------------ Total distributions from net realized gains (9,060,286) (10,987,255) ------------ ------------ (9,327,210) (11,522,685) ------------ ------------ Net share transactions: (Note 5) Class III (48,222,297) (239,630,042) ------------ ------------ Decrease in net assets resulting from net share transactions (48,222,297) (239,630,042) ------------ ------------ Total increase (decrease) in net assets 7,306,438 (269,629,622) NET ASSETS: Beginning of period 129,983,371 399,612,993 ------------ ------------ End of period (including accumulated undistributed net investment income of $0 and $109,236, respectively) $137,289,809 $129,983,371 ============ ============
18 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, --------------------------------------- 2000 1999 1998 1997* -------- -------- -------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.88 $ 12.28 $ 9.82 $ 10.00 -------- -------- -------- -------- Income from investment operations: Net investment income 0.01 0.03 0.05 0.01 Net realized and unrealized gain (loss) 7.02 (0.98) 3.43 (0.19) -------- -------- -------- -------- Total from investment operations 7.03 (0.95) 3.48 (0.18) -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.03) (0.02) (0.06) -- In excess of net investment income -- -- (0.01) -- From net realized gains (1.01) (0.43) (0.95) -- -------- -------- -------- -------- Total distributions (1.04) (0.45) (1.02) -- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 16.87 $ 10.88 $ 12.28 $ 9.82 ======== ======== ======== ======== TOTAL RETURN(a) 67.27% (8.20)% 36.66% (1.80)%+ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $137,290 $129,983 $399,613 $159,898 Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48%** Net investment income to average daily net assets 0.09% 0.21% 0.47% 0.70%** Portfolio turnover rate 122% 113% 132% 13% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.03 $ 0.03 $ 0.01
(a) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. * Period from December 31, 1996 (commencement of operations) to February 28, 1997. ** Annualized. + Not annualized. See accompanying notes to the financial statements. 19 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Small Cap Growth Fund (the "Fund"), is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term growth of capital. The Fund's benchmark is the Russell 2500 Growth Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the 20 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund loaned securities having a market value of $11,836,035, collateralized by cash in the amount of $12,215,454, which was invested in short-term instruments. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund enters into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The Fund also enters into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the 21 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 29, 2000, there were no open swap agreements. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. The differences are primarily due to the classification of distributions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable 22 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $39,963 $(39,963) $ --
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases and fee on redemptions of Fund shares is .50% of the amount invested or redeemed. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $34,968 in purchase premiums and $321,811 in redemption fees. There is no premium for reinvested distributions or in-kind transactions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder 23 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .50% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeded .33% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $1,316. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $151,598,478 and $201,237,382, respectively. At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $99,309,257 $60,064,790 $(9,542,766) $50,522,024
4. PRINCIPAL SHAREHOLDER At February 29, 2000, 31.1% of the outstanding shares of the Fund were held by one shareholder. 24 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ------------------------ -------------------------- Shares Amount Shares Amount Class III: ---------- ------------ ----------- ------------- Shares sold 565,817 $ 6,993,580 3,439,182 $ 39,799,712 Shares issued to shareholders in reinvestment of distributions 692,802 9,146,296 907,024 11,146,358 Shares repurchased (5,062,220) (64,362,173) (24,951,990) (290,576,112) ---------- ------------ ----------- ------------- Net decrease (3,803,601) $(48,222,297) (20,605,784) $(239,630,042) ========== ============ =========== =============
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FUTURES CONTRACTS
Number of Contracts Type ----------------------------------- --------------------------------------------- Buys 6 Russell 2000 Number of Contract Net Unrealized Contracts Expiration Date Value Appreciation -------------------------- --------------------------------------------- ---------- -------------- Buys 6 March 2000 $1,739,250 $300,385 ========
At February 29, 2000, the Fund has sufficient cash and/or securities to cover any commitments or margin on open futures contracts. 25 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 34.5% of distributions as net capital gain dividends. 26 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are primarily responsible for the day-to-day management of the Fund's portfolio. Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Small Cap Growth Fund returned 67.3% for the fiscal year ended February 29, 2000 as compared to 11.7% for the S&P 500 and 105.5% for the Russell 2500 Growth Index. Consistent with the Fund's investment objectives and policies, the Fund was primarily invested in common stocks throughout the period. For the fiscal year, small capitalization growth stocks outperformed all other market capitalization bands in the U.S. market. Market returns were driven by the lofty returns of a small number of technology and telecommunications stocks. The majority of the other sectors in the Russell 2500 Growth Index besides technology, telecommunications and integrated oils posted negative returns for the fiscal year, including consumer staple, consumer discretionary, financial services and auto/transportation stocks. Though performance was strong on an absolute basis, the Fund significantly underperformed its benchmark for the fiscal year. The performance shortfall was attributed both to weak sector and stock selection. The Fund's focus on more reasonably priced stocks within all other sectors of the small cap market beside technology detracted from performance as many of these sectors posted negative returns. The GMO Small Cap Growth Fund selects stocks based on three strategies: the trend in consensus analyst estimates, price momentum and earnings surprise. Using these strategies, we favor the stocks of companies that have had upward revisions in earnings expectations, strong price momentum and positive earnings surprises. Although on a long-term basis our strategies for selecting small cap growth stocks have added value, two out of the three strategies fared poorly in the fiscal year. The price momentum strategy added value while the earnings momentum and earnings surprise strategies underperformed. Stock selection was particularly weak among technology, telephone utilities, consumer discretionary and financial services stocks. OUTLOOK We do not expect the strong performance of Internet stocks to persist indefinitely. Accordingly, we expect our strategy of focusing on more reasonably priced small cap growth stocks to generate much better returns relative to the benchmark. In our asset allocation accounts, while we are overweight in small cap stocks relative to large cap stocks, we strongly prefer the small cap value sector of the market to small cap growth. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO SMALL CAP GROWTH FUND CLASS III SHARES AND THE RUSSELL 2500 GROWTH INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 12/31/96 1yr 5yr 10yr (ITD) 65.61 N/A 25.27
[GRAPH]
Date GMO Small Cap Growth Fund-III Russell 2500 Growth 12/31/96 9950 10000 3/31/97 9502 9200 6/30/97 11207 10696 9/30/97 13388 12475 12/31/97 12407 11477 3/31/98 13983 12755 6/30/98 13756 12133 9/30/98 10718 9438 12/31/98 13125 11831 3/31/99 12381 11707 6/30/99 13791 13675 9/30/99 13477 13201 12/31/99 17113 18398 2/29/00 20401 22987
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 50 bp on the purchase and 50 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. gg GMO REIT FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO REIT FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO REIT Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 GMO REIT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- REAL ESTATE INVESTMENTS -- 97.5% COMMON STOCKS -- 10.1% DIVERSIFIED -- 1.9% 92,500 Catellus Development Corp* 1,138,906 50,000 St. Joe Co 1,209,375 ----------- 2,348,281 ----------- LODGING -- 5.5% 255,000 Starwood Hotels and Resorts Worldwide Inc 5,721,562 374,871 Wyndham International Inc, Class A* 890,319 ----------- 6,611,881 ----------- OFFICE -- 2.4% 43,800 Brookfield Properties Corp 451,687 165,000 Trizec Hahn Corporation 2,444,062 ----------- 2,895,749 ----------- UTILITIES -- 0.3% 20,000 Reliant Energy Inc 411,250 ----------- TOTAL COMMON STOCKS (COST $26,960,638) 12,267,161 ----------- PREFERRED STOCKS -- 0.2% OFFICE -- 0.2% 10,000 Reckson Associates Realty Corp 7.625% 185,625 ----------- TOTAL PREFERRED STOCKS (COST $193,525) 185,625 ----------- REAL ESTATE INVESTMENT TRUSTS -- 87.2% APARTMENTS -- 12.0% 75,000 Apartment Investment & Management Co, Class A 2,775,000 26,300 BRE Properties Inc 621,337 82,500 Cornerstone Realty Income Trust 825,000 135,000 Equity Residential Properties Trust 5,391,543 29,600 Gables Residential Trust 651,200 25,000 Mid America Apartment Community 571,875 27,500 Smith (Charles E) Residential 960,781 37,500 Summit Properties Inc 712,500 157,500 United Dominion Realty Trust Inc 1,575,000
See accompanying notes to the financial statements. 1 GMO REIT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- APARTMENTS -- CONTINUED 17,500 Walden Residential Properties Inc 403,594 ----------- 14,487,830 ----------- DIVERSIFIED -- 16.1% 90,000 Colonial Properties Trust 2,244,375 412,500 Crescent Real Estate Equities 7,038,281 75,000 Glenborough Realty Trust Inc 1,120,312 50,000 Meditrust Corp 140,625 115,000 The Rouse Company 2,515,625 207,500 Vornado Realty Trust 6,341,719 ----------- 19,400,937 ----------- FACTORY OUTLET -- 0.5% 20,000 Chelsea GCA Realty Inc 530,000 17,500 Prime Retail Inc 40,469 ----------- 570,469 ----------- INDUSTRIAL -- 6.7% 57,500 Eastgroup Properties Inc 1,132,031 90,000 First Industrial Realty Trust 2,340,000 82,500 Liberty Property Trust 1,871,719 149,000 Prologis Trust 2,691,313 ----------- 8,035,063 ----------- LODGING -- 5.4% 95,000 Felcor Lodging Trust Inc 1,626,875 34,200 Hospitalities Properties Trust 662,625 475,000 Host Marriott Corp 4,215,625 ----------- 6,505,125 ----------- MANUFACTURED HOUSING -- 0.6% 29,000 Chateau Communities Inc 717,750 ----------- OFFICE -- 35.0% 25,000 Alexandria Real Estate Equity Inc 764,062 42,900 Arden Realty Group Inc 892,856 71,000 Bedford Property Investors 1,189,250 17,500 Boston Properties Inc 530,469 225,000 Brandywine Realty Trust 3,600,000 45,000 CarrAmerica Realty Corp 956,250
2 See accompanying notes to the financial statements. GMO REIT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- OFFICE -- CONTINUED 62,500 Cornerstone Properties Inc 1,054,688 272,500 Duke Realty Investments 5,007,188 190,000 Equity Office Properties Trust 4,548,125 170,000 Highwood Properties Inc 3,559,375 55,700 Kilroy Realty Corp 1,190,588 62,800 Koger Equity Inc 1,110,775 265,000 Mack-Cali Realty Corp 6,293,750 73,600 Parkway Properties Inc 2,180,400 105,000 Prentiss Properties Trust 2,159,063 22,500 Prime Group Realty Trust 310,781 5,000 PS Business Parks Inc 109,375 67,500 Reckson Associates Realty Corp 1,248,750 24,955 Reckson Associates Realty Corp, Class B 497,540 42,500 SL Green Realty Corp 988,125 100,000 Speiker Properties Inc 4,012,500 ----------- 42,203,910 ----------- REGIONAL MALLS -- 7.7% 29,800 CBL & Associates Properties Inc 666,775 60,000 General Growth Properties 1,736,250 50,000 JP Realty Inc 903,125 68,600 Macerich Co 1,380,575 74,500 Mills Corp 1,261,844 42,500 Simon Property Group Inc 998,750 55,600 Urban Shopping Centers Inc 1,542,900 57,500 Westfield America Inc 812,188 ----------- 9,302,407 ----------- SELF STORAGE -- 0.4% 5,200 Public Storage Inc 114,725 15,000 Shurgard Storage Centers Inc 354,375 ----------- 469,100 ----------- SHOPPING/POWER CENTER -- 2.3% 100,000 Developers Diversified Realty Corp 1,150,000 49,400 JDN Realty Corp 531,050 76,780 New Plan Excel Realty Trust 1,070,121 ----------- 2,751,171 -----------
See accompanying notes to the financial statements. 3 GMO REIT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- TRIPLE NET LEASING -- 0.5% 37,375 Starwood Financial Inc 630,703 ------------- TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $134,518,373) 105,074,465 ------------- TOTAL REAL ESTATE INVESTMENTS (COST $161,672,536) 117,527,251 ------------- SHORT-TERM INVESTMENTS -- 5.4% CASH EQUIVALENTS -- 2.7% $ 1,890,780 BankBoston Eurodollar Time Deposit, 6.1175%, due 4/28/00(a) 1,890,780 $ 241,068 First Union National Bank Time Deposit, 5.8125%, due 3/01/00(a) 241,068 $ 361,602 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(a) 361,602 711,150 Merrimac Cash Fund Premium Class(a) 711,150 ------------- 3,204,600 ------------- REPURCHASE AGREEMENT -- 2.7% $ 3,226,820 Salomon Smith Barney, Inc. Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $3,227,264 and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest, of $3,291,356. 3,226,820 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $6,431,420) 6,431,420 ------------- TOTAL INVESTMENTS -- 102.9% (Cost $168,103,956) 123,958,671 Other Assets and Liabilities (net) -- (2.9%) (3,451,089) ------------- TOTAL NET ASSETS -- 100.0% $ 120,507,582 ============= NOTES TO THE SCHEDULE OF INVESTMENTS:
REIT - Real Estate Investment Trust * Non-income producing security. (a) Represents investments of security lending collateral (Note 1). 4 See accompanying notes to the financial statements. GMO REIT FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $168,103,956) (Note 1) $123,958,671 Dividends and interest receivable 97,638 Receivable for expenses waived or borne by Manager (Note 2) 5,629 ------------ Total assets 124,061,938 ------------ LIABILITIES: Payable upon return of securities loaned (Note 1) 3,204,600 Payable for Fund shares repurchased 247,872 Payable to affiliate for (Note 2): Management fee 52,083 Shareholder service fee 14,473 Accrued expenses 35,328 ------------ Total liabilities 3,554,356 ------------ NET ASSETS $120,507,582 ============ NET ASSETS CONSIST OF: Paid-in capital $182,982,556 Accumulated undistributed net investment income 6,717,589 Accumulated net realized loss (25,047,278) Net unrealized depreciation (44,145,285) ------------ $120,507,582 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $120,507,582 ============ SHARES OUTSTANDING: Class III 14,581,930 ============ NET ASSET VALUE PER SHARE: Class III $ 8.26 ============
See accompanying notes to the financial statements. 5 GMO REIT FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $4,586) $ 8,112,284 Interest (including securities lending income of $11,285) 163,011 ----------- Total income 8,275,295 ----------- EXPENSES: Management fee (Note 2) 705,890 Audit fees 40,040 Custodian and transfer agent fees 23,572 Registration fees 3,440 Legal fees 2,325 Trustees fees (Note 2) 1,405 Miscellaneous 2,285 Fees waived or borne by Manager (Note 2) (73,067) ----------- 705,890 Shareholder service fee (Note 2) Class III 196,081 ----------- Net expenses 901,971 ----------- Net investment income 7,373,324 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (9,323,816) Closed futures contracts 31,149 ----------- Net realized loss (9,292,667) ----------- Change in net unrealized appreciation (depreciation) on: Investments (2,875,371) Open futures contracts 14,056 ----------- Net unrealized loss (2,861,315) ----------- Net realized and unrealized loss (12,153,982) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(4,780,658) ===========
6 See accompanying notes to the financial statements. GMO REIT FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 7,373,324 $ 10,721,126 Net realized loss (9,292,667) (12,500,837) Change in net unrealized appreciation (depreciation) (2,861,315) (60,036,287) ------------ ------------- Net decrease in net assets from operations (4,780,658) (61,815,998) ------------ ------------- Distributions to shareholders from: Net investment income Class III (7,382,589) (3,197,384) ------------ ------------- Total distributions from net investment income (7,382,589) (3,197,384) ------------ ------------- Net realized gains Class III -- (15,126,689) ------------ ------------- Total distributions from net realized gains -- (15,126,689) ------------ ------------- (7,382,589) (18,324,073) ------------ ------------- Net share transactions: (Note 5) Class III (10,458,232) (151,505,021) ------------ ------------- Decrease in net assets resulting from net share transactions (10,458,232) (151,505,021) ------------ ------------- Total decrease in net assets (22,621,479) (231,645,092) NET ASSETS: Beginning of period 143,129,061 374,774,153 ------------ ------------- End of period (including accumulated undistributed net investment income of $6,717,589 and $7,233,108, respectively) $120,507,582 $ 143,129,061 ============ =============
See accompanying notes to the financial statements. 7 GMO REIT FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, --------------------------------------- 2000 1999 1998 1997* -------- -------- -------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.13 $ 12.92 $ 12.62 $ 10.00 -------- -------- -------- -------- Income from investment operations: Net investment income 0.51+ 0.51+ 0.53 0.24 Net realized and unrealized gain (loss) (0.87) (3.36) 1.26 2.60 -------- -------- -------- -------- Total from investment operations (0.36) (2.85) 1.79 2.84 -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.51) (0.19) (0.57) (0.17) In excess of net investment income -- -- (0.03) -- From net realized gains -- (0.75) (0.89) (0.05) -------- -------- -------- -------- Total distributions (0.51) (0.94) (1.49) (0.22) -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 8.26 $ 9.13 $ 12.92 $ 12.62 ======== ======== ======== ======== TOTAL RETURN(a) (4.69)% (23.27)% 14.29% 28.49%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $120,508 $143,129 $374,774 $260,929 Net expenses to average daily net assets 0.69% 0.69% 0.69% 0.69%** Net investment income to average daily net assets 5.64% 4.60% 4.10% 4.72%** Portfolio turnover rate 13% 59% 86% 21% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.03 $ 0.03 $ 0.02
(a) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. + Computed using average shares outstanding throughout the period. ++ Not annualized. * Period from May 31, 1996 (commencement of operations) to February 28, 1997. ** Annualized. 8 See accompanying notes to the financial statements. GMO REIT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO REIT Fund (the "Fund"), is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in or exposure to real estate investment trusts ("REITS"), which are managed vehicles that invest in real estate or real estate-related assets. The Fund's benchmark is the Morgan Stanley REIT Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an 9 GMO REIT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 29, 2000, the Fund held no open futures contracts. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund loaned securities having a market value of $3,114,638, collateralized by cash in the amount of $3,204,600, which was invested in short-term instruments. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. 10 GMO REIT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to the classification of distributions from REIT securities. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $(506,254) $506,254 $ --
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. The Fund's investments in REIT equity securities may at times result in the Fund's receipt of cash in excess of its interest in the REIT's earnings. The excess amount cannot be determined by the Fund at the time of receipt. If the Fund distributes amounts which are subsequently determined to exceed REIT earnings, such amounts would constitute a return of capital to Fund shareholders for federal income tax purposes. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities 11 GMO REIT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of return of capital is conclusively determined. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases and fee on redemptions of Fund shares is .50% of the amount invested or redeemed. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $166,908 in purchase premiums and $242,174 in redemption fees. There is no premium for reinvested distributions or in-kind transactions. INVESTMENT RISK There are certain additional risks involved in investing in REITs rather than a more diversified portfolio of investments. Since the Fund's investments are concentrated in real-estate related securities, the value of its shares can be expected to change in light of factors affecting the real estate industry, including local or regional economic conditions, changes in zoning laws, changes in real estate value and property taxes, and changes in interest rates. The value of the Fund's shares may fluctuate more widely than the value of shares of a portfolio that invests in a broader range of industries. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. 12 GMO REIT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Prior to March 1, 1999, GMO earned a management fee at the annual rate of .75% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeded .54% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $1,405. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $17,079,332 and $26,736,541, respectively. At February 29, 2000, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $168,802,843 $360,933 $(45,205,105) $(44,844,172)
4. PRINCIPAL SHAREHOLDER At February 29, 2000, 12.7% of the outstanding shares of the Fund were held by one shareholder. 13 GMO REIT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ------------------------ -------------------------- Shares Amount Shares Amount ---------- ------------ ----------- ------------- Class III: Shares sold 3,881,568 $ 33,381,589 2,311,420 $ 26,773,478 Shares issued to shareholders in reinvestment of distributions 483,941 4,594,949 1,482,780 16,781,879 Shares repurchased (5,462,918) (48,434,770) (17,130,461) (195,060,378) ---------- ------------ ----------- ------------- Net decrease (1,097,409) $(10,458,232) (13,336,261) $(151,505,021) ========== ============ =========== =============
14 GMO REIT FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- At February 29, 2000 the Fund had capital loss carryforwards available to offset future capital gains, if any, of the following amounts:
Year of Expiration Amount ------------------ ----------------- 2007 $ 8,368,927 2008 $15,979,464
15 GMO REIT FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. Jeremy Grantham, Mr. Richard Mayo and Mr. Wilson Magee are primarily responsible for the day-to-day management of the Fund's portfolio. Mssrs. Grantham and Mayo have been with Grantham, Mayo, Van Otterloo & Co. LLC since its founding in 1977. Mr. Magee has been with GMO for three years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO REIT Fund returned -4.7% during the twelve months ended February 28, 2000. The Morgan Stanley REIT Index (MSRI) returned - -1.3% while the S&P 500 returned 11.7% during the same period. REIT INDUSTRY REVIEW REIT performance during 1999 represented a significant improvement over 1998, but investor interest in the group continued to decline. Returns were buoyed by large dividends as stock prices, reacting to investor disinterest, fell by about 9%. Among major sectors, apartments, office and industrial property companies produced positive total returns, and were joined by the diversified and manufactured housing sectors in outperforming the benchmark. Retail property sectors were beset by investor fears about competition from internet retailing and, as a result, performed poorly. Lodging stocks also underperformed primarily due to bothersome levels of new construction in the face of declining revenue growth rates. Economic fundamentals in both the property markets and the property companies were generally very good, driving industry cash earnings growth in excess of 10% and leading companies to raise dividends by over 4.5%. Although cash earnings growth slowed, unleveraged property cash flow growth significantly beat inflation. Many REIT managements have concluded that the return on investment in their stock was the best use of capital, so announcements of stock repurchases proliferated. To date, over 60 companies have announced buybacks and over $5.0 billion has been repurchased. STOCK SELECTION The managers continue to reduce the number of issuers in the portfolio and to invest in companies based more on fundamental analysis and less on quantitative methods. Property sector weightings are decided by analyzing securities valuations by sector and assessing property market trends geographically. Stock selection uses three analysis models: 1) quality adjusted growth; 2) fundamental value; and 3) asset valuation. Manager judgment is crucial to final stock selection and is generally based on quality and sustainability of cash flows, limiting capital structure risks and quality of management. Due to the low volatility and nearly flat returns for REITs, we chose to implement these changes gradually, so portfolio turnover was quite low, at less than 20%. Sector selection was positive to relative performance for the fiscal year while stock selection was negative. GMO REIT FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- OUTLOOK Commercial construction spending has declined from recent peaks and underlying real estate markets are fundamentally sound with supply/demand conditions in equilibrium. Rental rate growth will moderate, but should exceed inflation for most property types. Rising interest rates will effect REIT cash earnings negatively, but will likely regulate construction spending even more. More companies have been focused on stabilizing balance sheets, reducing risk and improving financial flexibility and this should diminish the effect of rising interest rates. Real estate companies are embracing new ideas and new technology that will enable them to improve customer services, increase revenues and reduce costs. The REIT Modernization Act will allow REITs to operate taxable subsidiaries beginning in 2001 and this should lead to enhanced returns on invested capital for the better managed companies. REIT stock prices imply asset values that are below both private market property valuations and replacement costs, while REIT dividends yield over 8.5% are secure and growing rapidly. Continued cash earnings growth coupled with lower stock prices suggest that REIT valuations are very attractive. Stock buybacks should enhance forward earnings growth and, combined with limited equity issuance in 1999, reduce the supply of stock available. This bodes well for stock prices in 2000 and beyond. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO REIT FUND CLASS III SHARES AND THE MORGAN STANLEY REIT INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 5/31/96 1yr 5yr 10yr (ITD) - -5.64 N/A 1.64
[GRAPH]
Date GMO REIT Fund-III Morgan Stanley REIT Index 5/31/96 9950 10000 6/30/96 10089 10187 9/30/96 10786 10849 12/31/96 12744 13015 3/31/97 12876 13044 6/30/97 13483 13687 9/30/97 15037 15283 12/31/97 15210 15433 3/31/98 14939 15322 6/30/98 14113 14649 9/30/98 11817 13099 12/31/98 11505 12824 3/31/99 11075 12205 6/30/99 12303 13415 9/30/99 10994 12332 12/31/99 10969 12241 2/29/00 10631 12122
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 50 bp on the purchase and 50 bp on the redemption. Transaction fees are retained by the fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Fundamental Value Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 13, 2000 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------- COMMON STOCKS -- 102.4% BANKING AND FINANCIAL SERVICES -- 15.8% 500 Bank of America Corp 23,031 700 Block (HR) Inc 30,712 1,500 Washington Mutual Inc 33,187 --------- 86,930 --------- HEALTH CARE -- 17.5% 2,500 Acuson Corp* 33,437 1,000 Columbia HCA Healthcare Corp 19,312 2,500 Tenet Healthcare Corp* 43,750 --------- 96,499 --------- MACHINERY -- 5.4% 1,500 Pall Corp 29,625 --------- OIL AND GAS -- 16.4% 5,000 Gulf Canada Resources Ltd* 16,250 500 Questar Corp 6,969 2,500 Unocal Corp 66,875 --------- 90,094 --------- PAPER AND ALLIED PRODUCTS -- 12.0% 1,500 Fort James Corp 28,219 500 Kimberly-Clark Corp 25,844 500 St. Joe Co 12,094 --------- 66,157 --------- PHARMACEUTICALS -- 6.3% 1,000 Schering Plough Corp 34,875 --------- REAL ESTATE -- 2.2% 500 Mack-Cali Realty Corp, REIT 11,875 --------- REFINING -- 1.8% 500 Conoco Inc, Class B 9,844 ---------
See accompanying notes to the financial statements. 1 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------- RETAIL TRADE -- 13.1% 500 CVS Corp 17,500 1,500 TJX Cos Inc 23,906 2,500 Toys R Us Inc* 30,938 --------- 72,344 --------- TECHNOLOGY -- 8.4% 500 Avnet Inc 33,438 1,000 Storage Technology Corp* 12,750 --------- 46,188 --------- TELECOMMUNICATIONS -- 3.5% 500 SBC Communications Inc 19,000 --------- TOTAL COMMON STOCKS (COST $615,225) 563,431 --------- TOTAL INVESTMENTS -- 102.4% (Cost $615,225) 563,431 Other Assets and Liabilities (net) -- (2.4%) (12,942) --------- TOTAL NET ASSETS -- 100.0% $ 550,489 ========= NOTES TO THE SCHEDULE OF INVESTMENTS:
REIT - Real Estate Investment Trust
* Non-income producing security. 2 See accompanying notes to the financial statements. GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $615,225) (Note 1) $563,431 Receivable for investments sold 73,633 Dividends and interest receivable 5,599 -------- Total assets 642,663 -------- LIABILITIES: Payable for investments purchased 47,348 Due to custodian 13,282 Payable to affiliate for (Note 2): Management fee 277 Shareholder service fee 67 Accrued expenses and other liabilities 31,200 -------- Total liabilities 92,174 -------- NET ASSETS $550,489 ======== NET ASSETS CONSIST OF: Paid-in capital $481,624 Distributions in excess of net investment income (239,226) Accumulated undistributed net realized gain 360,314 Net unrealized depreciation (52,223) -------- $550,489 ======== NET ASSETS ATTRIBUTABLE TO: Class III shares $550,489 ======== SHARES OUTSTANDING: Class III 81,855 ======== NET ASSET VALUE PER SHARE: Class III $ 6.73 ========
See accompanying notes to the financial statements. 3 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $8,352) $ 690,283 Interest (including securities lending income of $2,849) 62,000 ----------- Total income 752,283 ----------- EXPENSES: Management fee (Note 2) 183,059 Audit fees 16,564 Custodian and transfer agent fees 11,063 Registration fees 2,012 Legal fees 1,071 Trustees fees (Note 2) 366 Miscellaneous 1,835 Fees waived or borne by Manager (Note 2) (32,911) ----------- 183,059 Shareholder service fee (Note 2) Class III 45,765 ----------- Net expenses 228,824 ----------- Net investment income 523,459 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 21,350,704 Foreign currency and foreign currency related transactions (229) ----------- Net realized gain 21,350,475 ----------- Change in net unrealized appreciation (depreciation) on: Investments (11,811,730) Foreign currency and foreign currency related transactions (498) ----------- Net unrealized loss (11,812,228) ----------- Net realized and unrealized gain 9,538,247 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $10,061,706 ===========
4 See accompanying notes to the financial statements. GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 523,459 $ 1,653,398 Net realized gain 21,350,475 28,697,755 Change in net unrealized appreciation (depreciation) (11,812,228) (26,005,231) ------------ ------------ Net increase in net assets from operations 10,061,706 4,345,922 ------------ ------------ Distributions to shareholders from: Net investment income Class III (703,229) (1,820,272) ------------ ------------ Total distributions from net investment income (703,229) (1,820,272) ------------ ------------ In excess of net investment income Class III (72,555) -- ------------ ------------ Total distributions in excess of net investment income (72,555) -- ------------ ------------ Net realized gains Class III (4,135,387) (43,849,538) ------------ ------------ Total distributions from net realized gains (4,135,387) (43,849,538) ------------ ------------ (4,911,171) (45,669,810) ------------ ------------ Net share transactions: (Note 5) Class III (86,661,873) (3,650,568) ------------ ------------ Decrease in net assets resulting from net share transactions (86,661,873) (3,650,568) ------------ ------------ Total decrease in net assets (81,511,338) (44,974,456) NET ASSETS: Beginning of period 82,061,827 127,036,283 ------------ ------------ End of period (including distributions in excess of net investment income income of $239,226 and accumulated undistributed net investment income of $179,770, respectively) $ 550,489 $ 82,061,827 ============ ============
See accompanying notes to the financial statements. 5 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 7.07 $ 11.92 $ 16.33 $ 15.04 $ 12.54 ---------- ------- -------- -------- -------- Income from investment operations: Net investment income 0.13+ 0.18 0.35 0.33 0.37 Net realized and unrealized gain 1.92 0.19 3.90 2.53 3.26 ---------- ------- -------- -------- -------- Total from investment operations 2.05 0.37 4.25 2.86 3.63 ---------- ------- -------- -------- -------- Less distributions to shareholders: From net investment income (1.35) (0.20) (0.38) (0.32) (0.37) In excess of net investment income (0.14) -- -- -- -- From net realized gains (0.90) (5.02) (8.28) (1.25) (0.76) ---------- ------- -------- -------- -------- Total distributions (2.39) (5.22) (8.66) (1.57) (1.13) ---------- ------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 6.73 $ 7.07 $ 11.92 $ 16.33 $ 15.04 ========== ======= ======== ======== ======== TOTAL RETURN(a) 33.16% 2.30% 30.43% 20.03% 29.95% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 550 $82,062 $127,036 $232,583 $212,428 Net expenses to average daily net assets 0.75% 0.75% 0.75% 0.75% 0.75% Net investment income to average daily net assets 1.72% 1.67% 1.84% 2.15% 2.61% Portfolio turnover rate 54% 34% 21% 25% 34% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.02 $ 0.04 $ 0.02 $ 0.01
(a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. + Computed using average shares outstanding throughout the period. 6 See accompanying notes to the financial statements. GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Fundamental Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term capital growth primarily through investment in stocks of approximately 20-30 companies. The Fund's benchmark is the S&P 500 Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. 7 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SECURITY LENDING The Fund may lend its securities to qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund had no securities on loan. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to differing treatments for redemptions in-kind. Gains resulting from such in-kind transactions amounted to $13,263,667. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $(166,671) $(20,638,266) $20,804,937
8 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .15% of the amount invested. The Manager may waive such premium to the extent that a transaction results in minimal brokerage and transaction costs to the Fund. All purchase premiums are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $751 in purchase premiums. There is no premium for cash redemptions, reinvested distributions or in-kind transactions. Effective April 7, 2000, the Fund will no longer charge a purchase premium. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .60% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. 9 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Prior to March 1, 1999, GMO earned a management fee at the annual rate of .75% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeded .60% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $366. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $15,709,866 and $105,122,156, respectively. At February 29, 2000, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $602,104 $8,745 $(47,418) $(38,673)
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 100% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders could have a material effect. 10 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 -------------------------- ------------------------- Shares Amount Shares Amount Class III: ------------ ------------ ----------- ------------ Shares sold 81,855 $ 500,376 2,272 $ 16,500 Shares issued to shareholders in reinvestment of distributions 597,068 4,179,059 5,275,741 43,852,942 Shares repurchased (12,211,324) (91,341,308) (4,319,130) (47,520,010) ------------ ------------ ----------- ------------ Net increase (decrease) (11,532,401) $(86,661,873) 958,883 $ (3,650,568) ============ ============ =========== ============
11 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGER Mr. Richard Mayo is responsible for the management of the GMO Fundamental Value Fund. Mr. Mayo has been a portfolio manager with GMO since its founding in 1977 and began his career in the late 1960's. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Fundamental Value Fund returned 33.2% for the fiscal year ended February 29, 2000, as compared to 11.7% for the S&P 500. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in common stocks throughout the period. The market the last six months has been consumed by the excitement of technology's potential spurred by the rapid development of the Internet. This has been a dilemma for valuation oriented money managers. Can many of these new companies meet the expectations now embedded in their lofty stock prices? They may grow dramatically, yet profitability is uncertain and they will be risky investments if investors' hopes are not realized. [CHART] We have participated in this market-dominating sector by buying some companies that are perceived to be "Old Economy" but which have some exposure in the exciting sectors. A good example is Bell Atlantic: after the merger with GTE, the company will be the largest wireless provider in the United States. Valuations of independent wireless companies suggest that Bell Atlantic's stock has very little of the wireless operation's value in the current price. We bought the stock and very quickly made a 20% profit. GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- Electronic Data Systems, International Rectifier, and Corning enjoyed tremendous gains, and we reduced or eliminated these positions. We are probably unique technology investors in this regard, taking profits. However, we look at the sector as offering opportunity; and since momentum investors dominate the pricing of these stocks, even though we are trying to participate in the lower risk segments, volatile price movements can affect our investments. This view is based on our opinion that most technology stocks are over-owned and extremely valued. Some opportunities still exist. Avnet--a semiconductor distributor--has lagged the surging semiconductor group. Now that profits are beginning to accelerate, we think the stock will be noticed and it only sells at 14x next year's projected earnings. Storage Technology is a work in progress. Profitability was postponed as the company tried to grow too fast. Management is being changed and we hope the new officers will be able to capitalize on the company's dominant position in tape storage. After year-end we added Pitney-Bowes (digitalization of the mailing process will stimulate revenues) and they may have a business-to-business market niche that may be underestimated. In technology, we are always looking for opportunities--it can't be ignored since it is now almost 35% of the S&P 500--but for the moment we prefer to be underweighted. Sometime out in the future, a 25% decline should be expected, and valuation will matter. In seeking other opportunities, we have looked for companies with double-digit growth rates where skepticism existed about the future. CVS is the best example. Investors thought the "dot com" competitors would significantly impact its growth potential. Growth investors liquidated their positions during the last year, driving the stock down 50%. At the low you could buy 15% growth at 15x earnings. We couldn't resist and now we are pleased to see some of these investors return. The company restored some confidence with the announcement of a $1 billion stock buyback. In the health care sector we have also added Columbia Healthcare and Tenet Health where skepticism has also created opportunity. Schering-Plough fits this mold also, but was more of a trading call as a major institution liquidated their position. Kimberly-Clark is another stable growth company at a reasonable price. The rest of the portfolio is a collection of companies with good fundamentals at record low valuations. Bank of America and H.R. Block both sell at 10-12 times earnings. The largest segment--energy--reached 15% of the portfolio and with the recent addition (after fiscal year end) of Texaco is near 20%. The investment GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- rationale is simple: the price of oil has gone from $20 per barrel to $30 per barrel, and since inventories are at ten-year lows, the price is not going back to $20. It is time for the price of oil to drift down and the stock prices to reverse their decline. The chart below tells the story. [CHART] The last situation I want to mention is Toys 'R Us. This company has the ingredients we search for at this phase of the market: extremely depressed stock price, business is decent (preferably healthy), and management is agitated about their low-valuation stock. To that end, we find it fascinating that the company announced a $1 billion stock repurchase while its total market capitalization is only $3 billion. We like to see such solid confirmation of our valuation analysis, and though this may be the most dramatic example, there are others. This is how you'll be able to make money in "Old Economy" stocks. We are excited about the opportunities. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO FUNDAMENTAL VALUE FUND CLASS III SHARES AND THE S&P 500 INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 10/31/91 1yr 5yr 10yr (ITD) 32.96 22.55 19.4
[GRAPH]
Date GMO Fundamental Value Fund-III S&P 500 10/31/91 9985 10000 12/31/91 10337 10695 3/31/92 10629 10426 6/30/92 10932 10625 9/30/92 11196 10960 12/31/92 11776 11512 3/31/93 13001 12015 6/30/93 13605 12074 9/30/93 14128 12385 12/31/93 14422 12673 3/31/94 14093 12191 6/30/94 14048 12243 9/30/94 15068 12841 12/31/94 14935 12840 3/31/95 16361 14090 6/30/95 17618 15435 9/30/95 18841 16661 12/31/95 19503 17664 3/31/96 20747 18613 6/30/96 21378 19448 9/30/96 21612 20049 12/31/96 23948 21720 3/31/97 23842 22302 6/30/97 26976 26196 9/30/97 29884 28158 12/31/97 30832 28967 3/31/98 33640 33007 6/30/98 33886 34096 9/30/98 30502 30705 12/31/98 33948 37244 3/31/99 33343 39099 6/30/99 37405 41856 9/30/99 39448 39242 12/31/99 46589 45079 2/29/00 43840 42004
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 15 bp on the purchase. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Small Cap Value Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 13, 2000 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ COMMON STOCKS -- 90.0% ADVERTISING -- 0.1% 800 Grey Advertising Inc 316,800 ------------ AEROSPACE -- 0.6% 35,100 BE Aerospace Inc* 311,512 17,600 Cordant Technologies Inc 569,800 8,900 Curtiss Wright Corp 329,300 19,600 Gencorp Inc 153,125 18,800 Kaman Corp, Class A 186,825 ------------ 1,550,562 ------------ AUTOMOTIVE -- 1.6% 17,300 Arvin Industries Inc 317,887 10,300 Bandag Inc 242,050 14,900 Borg Warner Automotive Inc 476,800 46,200 Cooper Tire & Rubber Co 499,537 23,500 Dura Automotive Systems Inc* 306,969 14,700 Lear Corp* 310,537 35,900 Meritor Automotive Inc 502,600 17,900 Modine Manufacturing Co 408,344 15,450 Monaco Coach Corp* 278,100 15,650 Smith (AO) Corp, Class B 269,962 14,900 Superior Industries International Inc 355,737 17,900 Wabash National Corp 250,600 ------------ 4,219,123 ------------ BANKING AND FINANCIAL SERVICES -- 5.2% 19,900 Advanta Corp, Class A 370,637 13,100 Astoria Financial Corp 311,944 18,800 Baldwin and Lyons Inc, Class B 340,750 32,800 Bancwest Corp 498,150 19,528 BOK Financial Corporation* 302,684 23,000 CFS Bancorp Inc 202,687 23,600 Comdisco Inc 907,125 27,800 Commercial Federal Corp 359,662 7,400 Corus Bancshares Inc 182,225 6,100 Dain Rauscher Corp 343,887 17,216 Downey Financial Corp 338,940
See accompanying notes to the financial statements. 1 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ BANKING AND FINANCIAL SERVICES -- CONTINUED 4,100 Duff & Phelps Credit Rating Co 327,487 8,500 Eaton Vance Corp 352,219 7,100 Financial Security Assurance Holdings Ltd 319,500 10,400 FINOVA Group Inc 297,700 13,100 First Bancorp Puerto Rico 222,700 5,000 First Citizens Bancshares, Class A 322,500 17,600 First Federal Financial Corp* 224,400 23,400 Heller Financial Inc 440,212 55,500 Imperial Credit Industries Inc* 319,125 13,000 Jefferies Group Inc 303,875 5,400 JSB Financial 260,887 20,300 Leucadia National Corp 433,912 23,600 Liberty Financial Cos 455,775 11,100 Metris Companies Inc 287,212 20,625 Morgan Keegan Inc 293,906 31,100 Pacific Century Financial Corp 472,331 19,050 PMI Group Inc 691,753 25,375 Raymond James Financial Corp 501,156 32,700 Resource America Inc 230,944 31,300 Riggs National Corp 312,023 23,900 Roslyn Bancorp Inc 367,462 83,296 Sovereign Bancorp Inc 603,896 8,500 Student Loan Group 330,437 12,100 TCF Financial Corp 239,731 8,101 UMB Financial Corp 272,396 8,800 Value Line Inc 315,700 24,764 Washington Federal Inc 379,199 ------------ 13,737,129 ------------ CHEMICALS -- 2.5% 20,700 Albemarle Corp 311,794 24,500 CK Witco Corp 260,312 24,400 Cytec Industries Inc* 591,700 9,400 Dexter Corp 433,575 18,600 Engelhard Corp 253,425 11,850 Ferro Corp 223,669 13,800 Geon Co 288,075 8,800 Great Lakes Chemical Corp 255,750 30,800 Hanna (MA) Co 352,275 51,400 IMC Global Inc 693,900
2 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CHEMICALS -- CONTINUED 45,200 Kaiser Aluminum Corp* 257,075 18,300 Lubrizol Corp 454,069 36,000 Millenium Chemicals Inc 504,000 23,800 Mississippi Chemical Corp 178,500 26,900 Olin Corp 416,950 15,800 Stepan Co 323,900 65,800 Terra Industries Inc 152,162 26,700 W.R. Grace & Co* 268,669 28,000 Wellman Inc 521,500 ------------ 6,741,300 ------------ COMPUTER AND OFFICE EQUIPMENT -- 2.7% 11,900 Advanced Micro Devices Inc* 465,587 9,300 CDW Computer Centers Inc* 510,337 9,900 Everex Systems Inc(a)* -- 36,900 Exabyte Corp* 295,200 57,700 Maxtor Corp* 461,600 8,300 Micros Systems Inc* 459,612 32,800 Neomagic Corp* 177,327 31,700 Reynolds & Reynolds Inc, Class A 875,712 5,100 Safeguard Scientifics Inc* 892,181 11,400 Sandisk Corp* 1,014,600 42,700 Silicon Graphics Inc* 418,994 22,600 Sterling Software Inc* 810,775 9,600 Zebra Technologies Corp* 639,000 ------------ 7,020,925 ------------ CONSTRUCTION -- 1.3% 9,100 Centex Construction Products Inc 211,575 25,100 Centex Corp 494,156 32,200 Foster Wheeler Corp 181,125 38,200 Horton (DR) Inc 429,750 27,300 Kaufman & Broad Home Corp 522,112 36,400 McDermott International Inc 341,250 23,300 Pulte Corp 391,731 14,600 Texas Industries Inc 438,000 26,600 Toll Brothers Inc* 442,225 ------------ 3,451,924 ------------
See accompanying notes to the financial statements. 3 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CONSUMER GOODS -- 5.7% 11,500 Bassett Furniture Industries Inc 155,250 8,641 Block Drug Co Inc, Class A 284,073 15,700 Brown Shoe Co Inc 164,850 72,300 Burlington Industries Inc* 203,344 39,800 Callaway Golf Co 477,600 58,700 Compucom Systems Inc* 264,150 2,750 CoorsTek Inc* 53,625 15,500 Department 56 Inc* 218,937 11,500 Enesco Group Inc 83,375 14,500 Fastenal Co 640,719 13,000 Footstar Inc* 320,937 12,900 Fossil Inc* 292,669 19,500 Furniture Brands International Inc* 313,219 42,600 Gibson Greetings Inc* 343,462 37,900 HA-LO Industries Inc* 402,687 28,000 Hon Industries Inc 516,250 13,281 Jones Apparel Group Inc* 300,483 24,800 Justin Industries 447,950 12,500 Kellwood Co 210,937 21,400 Kimball International, Class B 325,012 17,500 La-Z-Boy Chair Co 290,937 15,915 Lancaster Colony Corp 473,471 17,600 Liz Claiborne Inc 658,900 23,300 Mohawk Industries Inc* 516,969 41,300 Moore Corp Ltd 191,012 20,700 National Service Industries 424,350 37,800 Nautica Enterprises Inc* 399,262 49,200 Oakley Inc* 424,350 11,050 Oneida Ltd 196,137 16,100 Osh Kosh B Gosh, Class A 305,900 20,300 Pittston Brinks Group 362,862 27,300 Polo Ralph Lauren Corp* 457,275 31,700 Reebok International Ltd* 253,600 19,100 Russell Corp 263,819 9,700 Salton Inc* 457,112 5,100 Scholastic Corp* 264,244 24,700 Steelcase Inc 302,575 73,432 Sunbeam Corp* 302,907 28,700 Tech Data Corp* 622,431 13,000 Tupperware Corp 223,437
4 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CONSUMER GOODS -- CONTINUED 30,100 Unifi Inc* 287,831 44,320 US Industries Inc 506,910 21,300 Wallace Computer Services 222,319 31,400 Warnaco Group Inc, Class A 341,475 35,100 Wolverine World Wide Inc 403,650 ------------ 15,173,264 ------------ ELECTRONIC EQUIPMENT -- 10.4% 14,100 Adaptec Inc* 578,100 29,400 Andrew Corp* 727,650 59,700 Arrow Electronics Inc* 1,805,925 28,800 Atmel Corp* 1,425,600 16,600 AVX Corp 1,054,100 9,600 C-Cube Microsystems Inc* 895,200 17,300 Cable Design Technologies Corp* 400,062 7,500 Ciena Corp* 1,198,594 6,700 Coherent Inc* 710,200 6,300 CTS Corp 406,350 12,800 Cypress Semiconductor Corp* 584,000 14,400 Dallas Semiconductor Corp 581,400 20,900 Diebold Inc 512,050 7,800 DII Group Inc* 754,162 840 eMerge Interactive Inc, Class A* 44,625 3,800 Franklin Electric Inc 253,175 6,800 Hadco Corp* 376,550 6,500 Harman International Industries 402,594 12,100 Hubbell Inc, Class B 294,181 29,500 Hussmann International Inc 425,906 13,000 Imation Corp* 402,187 18,500 International Rectifier Corp* 774,687 12,600 Intervoice Inc* 455,175 15,600 Kemet Corp* 958,425 7,300 Lattice Semiconductor Corp* 512,825 17,800 Lincoln Electric Holdings Inc 347,100 7,800 Litton Industries* 233,512 16,200 LSI Logic Corp* 1,037,812 21,700 MEMC Electronic Materials Inc* 378,394 16,200 Methode Electronics, Class A 941,625 10,700 Microchip Technology Inc* 668,081 14,600 National Semiconductor Corp* 1,096,825
See accompanying notes to the financial statements. 5 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ ELECTRONIC EQUIPMENT -- CONTINUED 26,800 Oak Technology Inc* 489,100 24,400 Pioneer Standard Electronics Inc 448,350 24,400 SCI Systems Inc* 982,100 37,100 Sensormatic Electronics Corp* 704,900 22,300 Silicon Valley Group Inc* 564,469 7,200 Siliconix Inc* 583,200 27,700 SLI Inc* 337,594 17,800 Thomas & Betts Corp 399,387 19,300 Valmont Industries Inc 291,912 32,937 Vishay Intertechnology Inc* 1,416,291 54,728 Zilog Inc(b)* 136,393 ------------ 27,590,768 ------------ ENTERTAINMENT & LEISURE -- 0.2% 25,800 Metro Goldwyn Mayer Inc* 615,975 ------------ FOOD AND BEVERAGE -- 1.8% 8,100 Agribrands International Inc* 296,156 18,800 Corn Product International Inc 442,975 9,600 Dean Foods Co 260,400 2,500 Farmer Brothers Co 400,000 47,700 IBP Inc 596,250 12,400 International Multifoods Corp 135,625 23,600 Interstate Bakeries Corp 269,925 22,600 Luby's Cafeterias Inc 235,887 11,900 Michael Foods Inc 260,312 23,700 Pilgrims Pride Corp 189,600 790 Seaboard Corp 141,410 15,600 Smithfield Foods Inc* 241,800 14,600 Suiza Foods Corp* 571,225 16,900 Universal Corp 276,737 21,650 Universal Foods Corp 391,053 ------------ 4,709,355 ------------ HEALTH CARE -- 3.5% 20,700 Apria Healthcare Group* 294,975 13,700 Arrow International Inc 541,150 65,400 Beverly Enterprises Inc* 171,675 13,733 Bindley Western Industries Inc 236,036
6 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ HEALTH CARE -- CONTINUED 35,700 Coventry Health Care Inc* 292,294 21,200 Dentsply International Inc 543,250 20,900 First Health Group Corp* 504,212 13,800 Haemonetics Corp* 328,612 21,800 Health Management Associates Inc* 234,350 9,200 Hillenbrand Industries Inc 279,450 20,600 Invacare Corp 502,125 91,500 Laboratory Corporation of America Holdings* 366,000 19,400 Lincare Holdings Inc* 454,687 21,000 Mallinckrodt Inc 517,125 32,800 Manor Care Inc* 284,950 93,900 Mariner Post-Acute Network Inc* 16,902 43,900 Mid Atlantic Medical Services Inc* 359,431 15,000 Ocular Sciences Inc* 225,000 15,500 Quest Diagnostics Inc* 531,844 41,200 Quorum Health Group Inc* 366,940 21,300 RightCHOICE Managed Care, Class A* 315,506 25,450 Sierra Health Services Inc* 155,881 27,600 Sola International Inc* 138,000 29,500 Sunrise Assisted Living Inc* 372,437 26,900 Sunrise Medical Inc* 116,006 15,100 Trigon Healthcare Inc* 482,256 11,300 Universal Health Services, Class B* 439,287 9,500 Wesley Jessen Visioncare Inc* 273,125 ------------ 9,343,506 ------------ INSURANCE -- 4.9% 1,557 Alleghany Corp* 289,505 20,400 American Financial Group Inc 428,400 7,500 American National Insurance Co 438,750 13,900 Amerus Life Holdings Inc 282,344 17,500 Argonaut Group Inc 332,500 437,600 ARM Financial Group Inc, Class A 19,692 15,500 Berkley (WR) Corp 248,969 15,300 Commerce Group Inc 457,087 12,999 Delphi Financial Group Inc* 342,849 7,500 Erie Indemnity Company - Class A 232,500 23,300 Everest Re Group Ltd 572,306 18,870 Fidelity National Financial Inc 237,054 37,950 First American Financial Corp 441,169
See accompanying notes to the financial statements. 7 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ INSURANCE -- CONTINUED 65,410 Foundation Health Systems Inc, Class A* 543,721 52,830 Fremont General Corp 383,017 7,000 Gallagher (Arthur J) and Co 357,875 19,800 Harleysville Group Inc 258,637 32,300 HCC Insurance Holdings Inc 411,825 14,100 Horace Mann Educators Corp 218,550 58,800 Humana Inc* 400,575 15,900 Kansas City Life Insurance Co 508,800 4,800 Liberty Corp 161,400 21,600 Mercury General Corp 490,050 15,700 Mony Group Inc 449,412 35,300 Ohio Casualty Corp 436,837 37,700 Old Republic International Corp 440,619 21,200 Oxford Health Plans Inc* 327,275 8,800 Pacificare Health Systems Inc* 399,850 21,300 Presidential Life Corp 332,812 16,200 Radian Group Inc 561,937 86,100 Reliance Group Holdings Inc 382,069 9,643 RLI Corp 287,482 22,400 Selective Insurance Group 345,800 5,200 Transatlantic Holding Inc 366,275 10,350 Trenwick Group Inc 136,491 31,900 UICI* 279,125 38,100 Vesta Insurance Group* 183,356 ------------ 12,986,915 ------------ LODGING -- 0.1% 106,600 Wyndham International Inc, Class A* 253,175 ------------ MACHINERY -- 4.8% 36,700 Agco Corp 403,700 18,500 Cooper Cameron Corp* 1,022,125 24,400 Cummins Engine Inc 812,825 17,700 Detroit Diesel Corp 296,475 22,000 Donaldson Co Inc 500,500 22,300 Federal Mogul Corp 303,837 19,400 Flowserve Corp 223,100 14,000 FMC Corp* 676,375 14,400 Kaydon Corp 331,200
8 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ MACHINERY -- CONTINUED 22,700 Kennametal Inc 527,775 8,700 Kulicke & Soffa Industries* 691,650 6,400 Lam Research Corp* 999,200 27,400 Milacron Inc 380,175 7,400 Nordson Corp 286,750 10,500 Novellus System Inc* 622,781 13,700 Smith International Inc* 858,819 30,200 SpeedFam-IPEC Inc* 870,137 16,300 Stanley Works 374,900 10,600 Starrett (LS) Co, Class A 243,800 10,000 Tecumseh Products Co 431,250 14,900 Tecumseh Products Co, Class B 600,656 9,900 Toro Co 327,937 14,000 Varian Medical Systems Inc* 559,125 24,400 York International Corp 442,250 ------------ 12,787,342 ------------ MANUFACTURING -- 3.5% 25,000 ACX Technologies Inc* 79,687 29,700 Amcast Industrial Corp 354,544 26,600 American Greetings Corp 458,850 15,600 Applied Power Inc, Class A 377,325 16,700 Armstrong World Industries Inc 317,300 11,300 Ball Corp 304,394 12,400 Barnes Group Inc 175,925 13,000 Blyth Industries Inc* 291,687 41,000 Champion Enterprises Inc* 258,812 67,612 Clayton Homes Inc 549,348 29,050 Crane Co 577,369 6,000 CSS Industries Inc* 114,375 60,400 General Cable Corp 604,000 12,000 Gentex Corp* 350,626 7,500 Greif Brothers Corp 236,250 34,300 Griffon Corp* 287,262 17,700 Harsco Corp 439,181 20,700 International Game Technology* 368,719 22,300 Lafarge Corp 439,031 15,800 Lydall Inc* 111,587 5,000 Mine Safety Appliances 317,500 19,900 NCI Building Systems Inc* 300,987
See accompanying notes to the financial statements. 9 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ MANUFACTURING -- CONTINUED 28,200 Omnicare Inc 259,087 15,100 Owens Corning 218,950 5,900 Sequa Corp, Class A* 218,669 13,200 Standex International Corp 208,725 22,000 Tower Automotive Inc* 261,250 22,300 Trinity Industries Inc 493,387 17,100 Watts Industries Inc, Class A 247,950 ------------ 9,222,777 ------------ METALS AND MINING -- 0.7% 30,200 Arch Coal Inc 268,025 12,900 Cleveland Cliffs Inc 321,694 11,500 Commercial Metals Co 317,687 5,200 Nacco Industries Inc, Class A 225,875 12,700 Southern Peru Copper Corp 193,675 36,200 Timken Co 518,112 ------------ 1,845,068 ------------ OIL AND GAS -- 5.2% 8,900 Apache Corp 324,850 24,300 BJ Services Co* 1,386,619 11,200 Cal Dive International Inc* 403,200 26,600 Ensco International Inc 804,650 10,400 Equitable Resources Inc 392,600 191,140 Friede Goldman International Inc* 1,003,485 34,900 Global Industries Limited* 357,725 25,800 Global Marine Inc* 578,888 17,500 Helmerich & Payne Inc 465,938 43,800 KCS Energy Inc* 60,225 14,000 Kerr-McGee Corp 626,500 34,900 Kinder Morgan Inc 972,838 18,700 Mitchell Energy, Class B 393,869 32,000 Nabors Industries Inc* 1,148,000 25,200 National-Oilwell Inc* 611,100 36,800 Newpark Resources Inc* 287,500 53,000 Ocean Energy Inc* 566,438 19,500 Pogo Producing Co 450,938 33,900 Pride International Inc* 502,144 25,900 R&B Falcon Corp* 399,831
10 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ OIL AND GAS -- CONTINUED 8,900 Seacor Smit Inc* 431,650 32,600 Tidewater Inc 922,988 32,500 Varco International Inc* 359,531 20,900 Veritas DGC Inc* 418,000 ------------ 13,869,507 ------------ PAPER AND ALLIED PRODUCTS -- 2.3% 17,800 Boise Cascade Corp 530,663 6,400 Bowater Inc 314,800 16,100 Caraustar Industries Inc 267,663 79,700 Ikon Office Solutions Inc 557,900 5,926 Kimberly-Clark Corp 306,300 31,400 Louisiana Pacific Corp 370,913 29,700 Mail-Well Inc* 258,019 15,500 Pentair Inc 532,813 11,200 Potlatch Corp 425,600 26,500 Rock-Tenn Co, Class A 298,125 24,800 Shorewood Packaging Corp* 514,600 20,121 Smurfit-Stone Container Corp* 274,149 15,900 Sonoco Products Co 293,156 14,900 United Stationers Inc* 400,438 26,700 Wausau-Mosinee Paper Corp 348,769 15,300 Westvaco Corp 421,706 ------------ 6,115,614 ------------ PHARMACEUTICALS -- 0.9% 18,900 Amerisource Health Corp* 275,231 49,450 Bergen Brunswig Corp, Class A 244,159 31,800 Henry Schein Inc* 596,250 21,900 ICN Pharmaceuticals Inc 435,263 30,575 Mark IV Industries Inc 611,500 29,800 Nu Skin Enterprises Inc* 266,338 ------------ 2,428,741 ------------ PRIMARY MATERIALS -- 0.8% 20,500 A. Schulman Inc 271,625 12,900 Carlisle Cos Inc 427,313 9,000 Florida Rock Industries 299,813 22,400 Weatherford International Inc 1,008,000
See accompanying notes to the financial statements. 11 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ PRIMARY MATERIALS -- CONTINUED 7,700 West Pharmaceutical Services Inc 226,669 ------------ 2,233,420 ------------ PRIMARY PROCESSING -- 2.6% 52,300 AK Steel Holding Corp 434,744 8,500 Ameron Inc 296,438 14,400 Belden Inc 325,800 85,200 Bethlehem Steel Corp* 484,575 15,300 Carpenter Technology Corp 340,425 22,300 Howmet International Inc* 408,369 15,500 Lone Star Technologies Inc* 581,250 125,800 LTV Corp 416,713 4,200 Maxxam Inc* 123,375 10,000 Mueller Industries Inc* 286,250 37,900 National Steel Corp, Class B 265,300 8,400 NCH Corp 332,850 28,300 Oregon Steel Mills Inc 116,738 14,900 Precision Castparts Corp 384,606 14,800 Quanex Corp 315,425 20,700 Rouge Industries Inc, Class A 159,131 15,900 Ryerson Tull Inc 210,675 25,513 Superior TeleCom Inc 318,913 29,700 USX-US Steel Group Inc 649,688 10,600 Valspar Corp 347,813 ------------ 6,799,078 ------------ PRINTING AND PUBLISHING -- 0.6% 26,000 Consolidated Graphics Inc* 355,875 26,100 Hollinger International Inc 314,831 21,500 TV Guide Inc, Class A* 1,013,188 ------------ 1,683,894 ------------ REAL ESTATE -- 0.8% 34,000 Lennar Corp 561,000 26,700 Meristar Hospitality Corp, REIT 425,531 12,100 Parkway Properties Inc, REIT 358,463 39,900 Prison Realty Trust Inc, REIT 204,488 29,700 Security Capital Group, Class B, REIT* 384,244
12 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ REAL ESTATE -- CONTINUED 12,600 Webb (Del) Corp* 189,000 ------------ 2,122,726 ------------ REFINING -- 0.7% 11,400 Holly Corp 151,050 41,100 Lyondell Petro Chemical Co 351,919 6,800 Murphy Oil Corp 344,250 20,392 Ultramar Diamond Shamrock Corp 442,252 21,300 Valero Energy Corp 543,150 ------------ 1,832,621 ------------ RETAIL TRADE -- 6.2% 134,700 7 Eleven Inc* 349,385 29,500 Action Performance Cos Inc* 267,344 16,400 Ames Department Stores Inc* 231,650 14,700 Applebees International Inc 413,898 13,700 BJ's Wholesale Club Inc* 424,700 26,600 Borders Group Inc* 327,513 24,540 Burlington Coat Factory Warehouse 280,676 34,100 Cash American Investments Inc 383,625 32,300 CBRL Group Inc 298,775 58,500 Charming Shoppes Inc* 351,000 45,300 CKE Restaurants Inc 288,788 18,100 Claire's Stores Inc 315,619 26,900 Consolidated Stores Corp* 302,625 12,000 CPI Corp 295,500 29,100 Dave and Busters Inc* 187,331 18,400 Dillard's Inc 319,700 19,200 Dress Barn Inc* 278,400 45,100 Goodys Family Clothing Inc* 315,700 15,500 Great Atlantic & Pacific Tea Co 363,281 6,800 Hannaford Brothers Co 484,500 62,100 Heilig Meyers Co 201,825 42,500 Inacom Corp* 143,438 30,200 Ingles Markets Inc, Class A 330,313 12,800 Jack in the Box Inc* 256,800 9,300 Lands End Inc* 308,644 35,900 Lone Star Steakhouse and Saloon Inc* 318,613 12,000 Michaels Stores Inc* 325,500
See accompanying notes to the financial statements. 13 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ RETAIL TRADE -- CONTINUED 25,500 Neiman Marcus Group Inc, Class A* 543,469 24,300 NPC International Inc* 200,475 92,200 OfficeMax Inc* 651,163 20,100 Outback Steakhouse Inc* 525,113 14,600 Payless ShoeSource Inc* 576,700 25,900 Petco Animal Supplies Inc* 278,425 28,500 Phillips Van Heusen 197,719 62,500 Pier 1 Imports Inc 546,875 53,500 Rainforest Cafe Inc* 214,000 41,400 Ross Stores Inc 600,300 15,800 Ruby Tuesday Inc 267,613 15,500 Ruddick Corp 208,281 33,700 Ryan's Family Steak Houses Inc* 322,256 23,600 Saks Inc* 271,400 19,600 Shopko Stores Inc* 325,850 45,500 Spiegel Inc, Class A* 327,031 25,600 The Pep Boys - Manny, Moe & Jack 158,400 25,500 Value City Department Stores Inc* 336,281 82,000 Venator Group Inc* 466,375 10,900 Weismarkets Inc 461,206 17,400 Whitehall Jewellers Inc* 340,388 8,400 Zale Corp* 316,050 ------------ 16,500,513 ------------ SERVICES -- 5.8% 42,300 Alternative Resources Corp* 142,763 9,300 Amerco* 159,263 6,300 Anchor Gaming* 262,238 23,325 Arctic Cat Inc 236,166 27,800 Avid Technology Inc* 488,238 18,000 Avis Rent a Car Inc* 262,125 31,700 Aztar Corp* 301,150 12,150 Banta Corp 221,738 16,000 Berlitz International Inc* 246,000 27,300 Bowne and Co Inc 325,894 33,400 Buffets Inc* 290,163 15,000 Carmike Cinemas Inc, Class A* 117,188 6,700 Catalina Marketing Corp* 570,338 8,700 Chemed Corp 256,106 7,000 Chris Craft Industries Inc* 460,688
14 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SERVICES -- CONTINUED 26,100 Dollar Thrifty Automotive Group Inc* 342,563 29,900 Electro Rent Corp* 325,163 36,625 Encompass Services Corp* 263,242 35,400 Fleming Cos Inc 546,488 21,200 Franklin Covey Co* 173,575 31,900 Harrahs Entertainment Inc* 610,088 19,100 Hollywood Entertainment Corp* 194,581 36,100 Ingram Micro Inc* 390,331 26,300 Interim Services Inc* 655,856 28,600 Interpool Inc 189,475 13,200 Jacobs Engineering Group* 370,425 21,300 Kelly Services, Class A 512,531 38,900 Mandalay Resort Group* 547,031 25,600 Manpower Inc 836,800 15,250 Marcus Corp 159,172 48,200 Modis Professional Services Inc* 759,150 60,500 Olsten Corp 722,219 38,300 Prime Hospitality Corp* 325,550 11,500 Rent-A-Center Inc* 172,500 24,600 Republic Services Inc, Class A* 267,525 27,600 Res-Care Inc* 274,275 26,400 Rollins Truck Leasing Corp 221,100 29,800 Romac International Inc* 402,300 32,300 Staff Leasing Inc* 185,725 33,000 Staffmark Inc* 371,250 9,600 Stone & Webster Inc 122,400 24,200 Supervalu Inc 415,938 39,900 U.S. Oncology Inc* 164,588 17,700 United Rentals Inc* 276,563 24,100 Veterinary Centers of America Inc* 266,606 ------------ 15,405,068 ------------ TECHNOLOGY -- 5.1% 50,800 Acclaim Entertainment Inc* 252,415 30,000 Autodesk Inc 1,340,625 21,608 Avnet Inc 1,445,035 21,200 Cabletron Systems Inc* 1,038,800 23,000 Cambridge Technology Partners Inc* 345,000 21,600 Cirrus Logic Corp* 449,550 23,300 Computer Horizons Corp* 518,425
See accompanying notes to the financial statements. 15 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ TECHNOLOGY -- CONTINUED 13,200 Data Transmission Network Corp* 336,600 17,800 Datastream Systems Inc* 398,275 10,000 Deluxe Corp 234,375 7,000 Dionex Corp* 220,938 13,800 Esterline Corp* 153,525 22,400 G TECH Holdings Corp* 448,000 28,400 Gartner Group Inc, Class A 406,475 22,600 Inprise Corp* 228,825 7,500 Jack Henry and Associates Inc 524,063 15,200 Keane Inc* 364,800 13,700 Mettler-Toledo International Inc* 529,163 21,800 Midway Games Inc* 322,913 31,600 MTS Systems Inc 242,925 11,100 Network Associates Inc* 337,856 8,300 Plexus Corp* 468,691 26,100 Policy Management System Corp* 231,638 45,900 Renaissance Worldwide Inc* 240,975 34,900 Structural Dynamics Research Corp* 497,325 5,200 Symantec Co* 371,475 5,100 Synopsys Inc* 203,681 17,250 Tektronix Inc 1,000,500 31,300 Thermo Electron Corp* 489,063 ------------ 13,641,931 ------------ TELECOMMUNICATIONS -- 0.9% 9,780 Adtran Inc* 719,441 14,300 Aspect Communications Corp* 921,456 19,600 Pacific Gateway Exchange Inc* 396,900 2,300 Telephone and Data Systems Inc 242,650 7,300 West Teleservices* 144,175 ------------ 2,424,622 ------------ TEXTILES -- 0.4% 41,600 Cone Mills Corp* 163,800 4,200 Crystal Brands Inc(a) -- 21,050 Guilford Mills 194,713 25,300 Shaw Industries Inc 320,994 10,300 Springs Industries Inc, Class A 365,006 ------------ 1,044,513 ------------
See accompanying notes to the financial statements. 16 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ TRANSPORTATION -- 3.0% 23,400 Airborne Freight Corp 432,900 12,700 Alaska Air Group Inc* 336,550 19,900 America West Holdings Corp, Class B* 266,163 17,500 American Freightways Corp* 190,313 21,100 Atlantic Coast Airlines Holdings* 377,163 43,500 Brunswick Corp 769,406 8,800 CNF Transportation Inc 282,150 12,300 Continental Airlines Inc, Class B* 388,988 12,200 Expeditors International Washington Inc 460,550 23,900 Fleetwood Enterprises Inc 368,956 22,000 Frontier Airlines Inc* 244,750 12,700 GATX Corp 395,288 24,200 Heartland Express Inc* 345,607 62,100 Laidlaw Inc, Class B 190,181 7,500 Landstar System Inc* 421,406 8,300 Navistar International Corp* 271,825 37,300 Ryder System Inc 694,713 14,800 Swift Transportation Co* 219,225 15,400 US Freightways Corp 512,050 17,500 Werner Enterprises Inc 234,063 28,500 Wisconsin Central Transport* 352,688 17,300 Yellow Corp* 276,800 ------------ 8,031,735 ------------ UTILITIES -- 5.1% 13,000 Alliant Energy Corp 365,625 14,300 Avista Corp 429,894 12,400 Calpine Corp* 1,134,600 13,400 CH Energy Group Inc 382,738 45,700 Citizens Utilities, Class B* 696,925 9,900 Cleco Corp 316,800 14,300 CMP Group Inc 403,975 34,950 Connectiv Inc 498,038 35,095 Dynegy Inc 1,645,078 8,500 Eastern Utilities Associates 264,031 41,200 El Paso Electric Co* 393,975 19,600 Energen Corp 318,500 9,300 Hawaiian Electric Industries Inc 267,956 22,700 Keyspan Corp 462,513 7,300 Kinder Morgan Energy Partners 288,350
See accompanying notes to the financial statements. 17 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ UTILITIES -- CONTINUED 19,500 MCN Corp 469,219 22,000 Midamerican Energy Holdings Co* 761,750 36,400 Northeast Utilities 684,775 11,300 Nui Corporation 268,375 18,500 Oneok Inc 419,719 28,400 Public Service Co of New Mexico 436,650 13,100 Puget Sound Power and Light Co 266,094 16,500 RGS Energy Group Inc 324,844 8,300 TNP Enterprises Inc 358,456 20,240 UniSource Energy Corp 273,240 6,200 United Illuminating Co 251,875 24,600 Utilicorp United Inc 402,825 25,500 Western Gas Resources Inc 350,625 29,700 Western Resources Inc 458,494 ------------ 13,595,939 ------------ TOTAL COMMON STOCKS (COST $262,458,425) 239,295,830 ------------ RIGHTS AND WARRANTS -- 0.0% CONSUMER GOODS -- 0.0% 6,934 Sunbeam Corporation Warrants, Expires 08/24/03* 8,668 ------------ TOTAL RIGHTS AND WARRANTS (COST $0) 8,668 ------------ SHARES/ PAR VALUE ($) - ------------- SHORT-TERM INVESTMENTS -- 15.5% CASH EQUIVALENTS -- 3.4% $ 667,273 First Union National Bank Time Deposit, 5.8125%, due 3/01/00(c) 667,273 $ 1,000,909 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(c) 1,000,909 $ 126,124 BankBoston Eurodollar Time Deposit, 6.1175%, due 4/28/00(c) 126,124 1,075,984 Merrimac Cash Fund Premium Class(c) 1,075,984 $ 6,000,000 Prudential Securities Group, Inc. Master Note, 6.1875%, due 3/10/00(c) 6,000,000 ------------ 8,870,290 ------------
See accompanying notes to the financial statements. 18 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------- ------------------------------------------------------- ------------ U.S. GOVERNMENT -- 1.8% $ 4,835,000 U.S. Treasury Bill, 5.65%, due 6/29/00(d) 4,744,586 ------------ REPURCHASE AGREEMENTS -- 10.3% $ 13,716,669 Morgan Stanley Inc. Repurchase Agreement, dated 2/29/00, due 3/01/00, with a maturity value of $13,718,548 and effective yield of 4.93%, collateralized by a U.S. Treasury Obligation with a rate of 8.49%, maturity date of 10/12/00, and market value, including accrued interest, of $13,991,732. 13,716,669 ------------ $ 13,716,669 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/01/00, with a maturity value of $13,718,555 and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest, of $13,991,002. 13,716,669 ------------ 27,433,338 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $41,051,501) 41,048,214 ------------ TOTAL INVESTMENTS -- 105.5% (Cost $303,509,926) 280,352,712 Other Assets and Liabilities (net) -- (5.5%) (14,575,169) ------------ TOTAL NET ASSETS -- 100.0% $265,777,543 ============ NOTES TO THE SCHEDULE OF INVESTMENTS:
REIT - Real Estate Investment Trust
* Non-income producing security. (a) Bankrupt issuer. (b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees. (c) Represents investments of security lending collateral (Note 1). (d) Security has been segregated to cover margin requirements on open financial futures contracts (Note 1 and 6). See accompanying notes to the financial statements. 19 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $303,509,926) (Note 1) $280,352,712 Cash 6,451,177 Receivable for investments sold 1,332,000 Dividends and interest receivable 300,732 Receivable for variation margin on open futures contracts (Notes 1 and 6) 999,700 Receivable for open swap contracts (Notes 1 and 6) 642,213 Receivable for expenses waived or borne by Manager (Note 2) 25,151 ------------ Total assets 290,103,685 ------------ LIABILITIES: Payable upon return of securities loaned (Note 1) 8,870,290 Payable for Fund shares repurchased 15,294,121 Payable to affiliate for (Note 2): Management fee 72,083 Shareholder service fee 32,780 Accrued expenses 56,868 ------------ Total liabilities 24,326,142 ------------ NET ASSETS $265,777,543 ============ NET ASSETS CONSIST OF: Paid-in capital $285,540,044 Accumulated undistributed net investment income 525,151 Accumulated net realized gain 1,331,045 Net unrealized depreciation (21,618,697) ------------ $265,777,543 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $265,777,543 ============ SHARES OUTSTANDING: Class III 21,422,932 ============ NET ASSET VALUE PER SHARE: Class III $ 12.41 ============
20 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $3,884) $ 4,591,036 Interest (including securities lending income of $88,986) 831,656 ----------- Total income 5,422,692 ----------- EXPENSES: Management fee (Note 2) 1,119,033 Custodian and transfer agent fees 134,459 Audit fees 44,141 Legal fees 6,826 Trustees fees (Note 2) 3,826 Registration fees 2,159 Miscellaneous 4,754 Fees waived or borne by Manager (Note 2) (196,165) ----------- 1,119,033 Shareholder service fee (Note 2) Class III 508,651 ----------- Net expenses 1,627,684 ----------- Net investment income 3,795,008 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 12,096,326 Closed futures contracts 4,078,662 Closed swap contracts (8,074,003) ----------- Net realized gain 8,100,985 ----------- Change in net unrealized appreciation (depreciation) on: Investments 20,413,352 Open futures contracts 1,121,270 Open swap contracts 2,047,340 ----------- Net unrealized gain 23,581,962 ----------- Net realized and unrealized gain 31,682,947 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $35,477,955 ===========
See accompanying notes to the financial statements. 21 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 3,795,008 $ 5,029,707 Net realized gain 8,100,985 83,696,862 Change in net unrealized appreciation (depreciation) 23,581,962 (162,379,486) ------------ ------------ Net increase (decrease) in net assets from operations 35,477,955 (73,652,917) ------------ ------------ Distributions to shareholders from: Net investment income Class III (3,821,691) (5,866,332) ------------ ------------ Total distributions from net investment income (3,821,691) (5,866,332) ------------ ------------ Net realized gains Class III (10,205,405) (102,038,674) ------------ ------------ Total distributions from net realized gains (10,205,405) (102,038,674) ------------ ------------ (14,027,096) (107,905,006) ------------ ------------ Net share transactions: (Note 5) Class III (103,356,983) (240,370,696) ------------ ------------ Decrease in net assets resulting from net share transactions (103,356,983) (240,370,696) ------------ ------------ Total decrease in net assets (81,906,124) (421,928,619) NET ASSETS: Beginning of period 347,683,667 769,612,286 ------------ ------------ End of period (including accumulated undistributed net investment income of $525,151 and $552,066, respectively) $265,777,543 $347,683,667 ============ ============
22 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.69 $ 18.28 $ 15.89 $ 13.89 $ 13.61 -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.15 0.18 0.27 0.28 0.23 Net realized and unrealized gain (loss) 1.11 (2.50) 4.85 2.32 3.20 -------- -------- -------- -------- -------- Total from investment operations 1.26 (2.32) 5.12 2.60 3.43 -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.14) (0.19) (0.29) (0.27) (0.23) From net realized gains (0.40) (4.08) (2.44) (0.33) (2.92) -------- -------- -------- -------- -------- Total distributions (0.54) (4.27) (2.73) (0.60) (3.15) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 12.41 $ 11.69 $ 18.28 $ 15.89 $ 13.89 ======== ======== ======== ======== ======== TOTAL RETURN(a) 10.66% (14.74)% 34.43% 19.12% 27.18% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $265,778 $347,684 $769,612 $655,373 $231,533 Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48% 0.48% Net investment income to average daily net assets 1.12% 0.99% 1.51% 2.15% 1.67% Portfolio turnover rate 50% 49% 56% 58% 135% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.04 $ 0.04 $ 0.03 $ 0.02
(a) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. See accompanying notes to the financial statements. 23 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Small Cap Value Fund (the "Fund"), is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term growth of capital. The Fund's benchmark is GMO Russell 2500 Value + Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the 24 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund loaned securities having a market value of $8,477,207, collateralized by cash in the amount of $8,870,290, which was invested in short-term instruments. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the equity markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund enters into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The Fund also enters into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the 25 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, or that there may be unfavorable changes in the price of the security or index underlying these transactions. See Note 6 for a summary of the open swap agreements as of February 29, 2000. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are due to differing treatments for redemptions in-kind. Gains resulting from such in-kind transactions amounted to $1,045,273. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable 26 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $(232) $920,231 $(919,999)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases and fee on redemptions of Fund shares is .50% of the amount invested or redeemed. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $136,891 in purchase premiums and $670,299 in redemption fees. There is no premium for reinvested distributions or in-kind transactions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder 27 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the accrual rate of .50% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeded .33% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $3,826. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $160,626,903 and $293,306,994, respectively. At February 29, 2000, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $315,872,348 $38,989,356 $(74,508,992) $(35,519,636)
4. PRINCIPAL SHAREHOLDER At February 29, 2000, 24.56% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. 28 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 --------------------------- --------------------------- Shares Amount Shares Amount Class III: ------------ ------------- ------------ ------------- Shares sold 2,179,613 $ 27,387,551 6,086,481 $ 84,771,299 Shares issued to shareholders in reinvestment of distributions 987,722 12,477,700 7,418,240 103,948,872 Shares repurchased (11,478,311) (143,222,234) (25,867,398) (429,090,867) ------------ ------------- ------------ ------------- Net decrease (8,310,976) $(103,356,983) (12,362,677) $(240,370,696) ============ ============= ============ =============
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FUTURES CONTRACTS
Number of Contract Contracts Type Expiration Date Value --------- --------------------------------------------- --------------------------------------------- ------------ Buys 48 Russell 2000 March 2000 $13,914,000 Number of Net Unrealized Contracts Appreciation --------- -------------- Buys 48 $896,304 ========
At February 29, 2000, the Fund has sufficient cash and/or securities to cover any commitments or margin on open futures contracts. 29 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS
Notional Amount Expiration Net Unrealized Fund/Counterparty Date Description Appreciation ----------------- ---------- -------------------------------------------------- -------------- $12,930,095/ 12,069,505 7/21/00 Agreement with Lehman Brothers Finance S.A. dated $202,292 7/16/99 to pay (receive) the notional amount multiplied by the return on the Standard & Poor's 500 Index (including dividends) less the notional amount multiplied by 3 month LIBOR adjusted by a specified spread and to receive (pay) the change in market value of a basket of selected securities (including dividends) less the counterparty's notional amount multiplied by 3 month LIBOR adjusted by a specified spread. 21,973,375/ 24,811,159 7/21/00 Agreement with Deutsche Bank AG dated 7/20/99 to 439,921 pay (receive) the notional amount multiplied by the return on the Standard & Poor's 500 Index (including dividends) less the notional amount multiplied by 3 month LIBOR adjusted by a specified spread and to receive (pay) the change in market value of a basket of selected securities (including dividends) less the counterparty's notional amount multiplied by 3 month LIBOR adjusted by a specified spread. -------- $642,213 ========
30 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 72.75% of the distributions as net capital gain dividends. 31 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are primarily responsible for the day-to-day management of the Fund's portfolio. Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Small Cap Value Fund returned 10.7% for the fiscal year ended February 29, 2000, as compared to 11.7% for the S&P 500 and 7.4% for the Russell 2500 Value Index. Consistent with the Fund's investment objectives and policies, the Fund was primarily invested in common stocks throughout the period. Technology was by far the strongest performing sector in the Russell 2500 Value Index. Healthcare stocks, particularly biotechnology stocks, were also strong performers during this period. On the other hand, auto/ transportation, consumer staple and financial services stocks posted negative returns. Sector selection was positive for the year. The Fund maintained an overweight position in technology stocks for most of the fiscal year, as well as an underweight in financial services. This positioning contributed 750 basis points in aggregate. The slight overweight in healthcare stocks also added value. Detracting from performance were the overweight positions in consumer discretionary (retail), telephone utilities, auto/ transportation and multi-industry stocks. Stock selection detracted from performance for the fiscal year. Selection among financial services and healthcare (drug) stocks was particularly weak, detracting -440 basis points in aggregate. Stock selection was also weak, albeit to a lesser extent, in materials/processing and producer durable stocks. Weak stock selection offset positive selection among auto/ transportation, energy and consumer staple stocks. In aggregate, stock selection in these industries contributed 130 basis points for the fiscal year. The INTRINSIC VALUE, BOOK VALUE and CASH FLOW stock selection strategies all added value while the PRICE-TO-SALES strategy was weak. OUTLOOK Small cap stocks, particularly small cap value stocks, are undervalued relative to the rest of the U.S. equity market. The Fund is positioned to take advantage of the valuation spread, and we are overweight with respect to smaller stocks in the Russell 2500 benchmark. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO SMALL CAP FUND CLASS III SHARES AND THE RUSSELL 2500 VALUE INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 12/31/91 1yr 5yr 10yr (ITD) 9.56 13.71 14.69
[GRAPH]
Date GMO Small Cap Value Fund-III Russell 2500 Value GMO Russell 2500 Value + 12/31/91 9950 10000 10000 3/31/92 10965 10844 10427 6/30/92 10975 10827 9954 9/30/92 11215 11151 10226 12/31/92 12360 12490 11617 3/31/93 13396 13619 12168 6/30/93 13580 13873 12423 9/30/93 14355 14739 13303 12/31/93 14851 14899 13540 3/31/94 14701 14665 13240 6/30/94 14229 14525 12772 9/30/94 15491 15225 13700 12/31/94 15422 14706 13409 3/31/95 16364 15627 14400 6/30/95 17499 17016 15683 9/30/95 19190 18378 17190 12/31/95 19628 19082 17660 3/31/96 20802 19944 18694 6/30/96 21509 20555 19472 9/30/96 22074 21192 19911 12/31/96 23585 23317 21019 3/31/97 23402 23505 21188 6/30/97 27021 26836 24190 9/30/97 30956 30175 27200 12/31/97 30595 31033 27974 3/31/98 34005 33994 30643 6/30/98 32855 32775 29543 9/30/98 26839 27375 24676 12/31/98 30605 30434 27434 3/31/99 27630 27997 25236 6/30/99 32671 32480 29278 9/30/99 29740 29671 26746 12/31/99 31508 30883 27838 2/29/00 30634 30110 27141
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 50 bp on the purchase and 50 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO U.S. Bond/Global Alpha A Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 13, 2000 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 101.9% ALBANIA -- 2.3% USD 15,681,227 Republic of Albania Par Bond, Zero Coupon, due 08/31/25 2,783,418 ----------- AUSTRIA -- 0.7% GBP 500,000 Bank Austria AG Series EMTN, 8.38%, due 11/04/11 870,416 ----------- BRAZIL -- 0.7% USD 1,000,000 Brazil Discount ZL Bond, Variable Rate, 6 mo. LIBOR + .81%, 6.94%, due 04/15/24 781,250 ----------- BULGARIA -- 0.3% USD 2,000,000 Bulgaria Discount Series B Interest Strips, Basket 2, 0.00%, due 07/28/24 358,000 ----------- CAYMAN ISLANDS -- 3.7% USD 5,000,000 Pemex Finance Ltd. Series 1A1 Class A2, 144A, 6.30%, due 05/15/10 4,460,000 ----------- GERMANY -- 1.7% GBP 2,000,000 Schweiz Bankgesellschaft, Zero Coupon, due 03/31/06 2,083,253 ----------- JORDAN -- 0.1% USD 250,000 Hashemite Kingdom of Jordan Par Bond, Variable Rate, Step Up, 144A, 6.00%, due 12/23/23 169,375 ----------- MEXICO -- 6.5% FRF 44,500,000 Mexico Par Bond, 6.63%, due 12/31/19 5,772,317 CHF 5,000,000 Mexico Par Bond, 3.75%, due 12/31/19 2,019,150 ----------- 7,791,467 ----------- NIGERIA -- 0.4% USD 987,181 Central Bank of Nigeria Par Bond Odd Lot, Variable Rate, Step Up, 6.25%, due 11/15/20(a) 510,866 ----------- SUPRA NATIONAL -- 0.8% AUD 11,800,000 European Bank for Reconstruction and Development, Zero Coupon, due 02/10/28 921,890 -----------
See accompanying notes to the financial statements. 1 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- SWEDEN -- 0.4% SEK 3,700,000 Kingdom of Sweden, 6.00%, due 02/09/05 427,228 ----------- UNITED STATES -- 84.3% ASSET BACKED SECURITIES -- 58.6% USD 3,000,000 American Express Credit Account Master Trust Series 99-6 Class A, Variable Rate, 1 mo. LIBOR + .20%, 6.09%, due 03/15/05 3,004,805 USD 9,000,000 American Express Credit Account Master Trust Series 99-5 Class A, Variable Rate, 1 mo. LIBOR + .24%, 6.13%, due 02/15/07 9,028,125 USD 1,000,000 BEA CBO Series 98-1A Class A2A, 144A, 6.72%, due 06/15/10 903,594 USD 20,500,000 Big Flower Receivables Master Trust Series 96-2 Class A, Variable Rate, LIBOR + .25%, 6.13%, due 04/25/03 20,192,500 USD 7,430,000 Brazos Student Loan Finance Corp Series 96-B Class A4, Variable Rate, 3 mo. U.S. Treasury Bill + .50%, 6.21%, due 12/01/02 7,421,873 USD 2,800,000 Cigna CBO Ltd Series 96-1 Class A2, 144A, 6.46%, due 11/15/08 2,786,000 USD 5,000,000 Discover Card Master Trust I Series 00-1 Class A, Variable Rate, 1 mo. LIBOR + .17%, 6.06%, due 08/16/07 4,998,828 USD 4,492,655 Northstar CBO Ltd. Series 97-2 Class A2, 144A, Variable Rate, Step Up, 6.62%, due 07/15/09 4,169,043 USD 3,000,000 NPF VI, Inc. Series 99-1 Class A, 144A, 6.25%, due 02/01/03 2,919,000 USD 3,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A, Variable Rate, Step Up, 6.33%, due 09/15/09 2,953,125 USD 10,000,000 Shyppco 98-1 A2B, 6.64%, due 06/15/10(b) 9,125,000 USD 3,000,000 Starvest Emerging Markets CBO-I Series 1A, Class A, Variable Rate, 6 mo. LIBOR + .19%, 144A, 6.41%, due 07/30/11 2,921,719 ----------- 70,423,612 ----------- STRUCTURED NOTES -- 2.4% USD 2,950,000 Polaris Funding Company, Variable Rate, 1 mo. LIBOR + .45%, 6.34%, due 01/07/05 2,889,617 ----------- U.S. GOVERNMENT -- 11.3% USD 10,100,000 U.S. Treasury 0.00% Receipts, due 02/15/10(a) 4,994,782 USD 10,100,000 U.S. Treasury 0.00% Receipts, due 02/15/12(a) 4,369,983 USD 10,100,000 U.S. Treasury 0.00% Receipts, due 08/15/12(a) 4,236,386 ----------- 13,601,151 -----------
See accompanying notes to the financial statements. 2 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY -- 12.0% USD 5,000,000 Federal Home Loan Bank, Variable Rate, CPI + 3.15%, 5.66%, due 02/15/02(c) 4,865,450 USD 10,000,000 Government National Mortgage Association, TBA, 7.00% 9,571,875 ----------- 14,437,325 ----------- TOTAL UNITED STATES 101,351,705 ----------- TOTAL DEBT OBLIGATIONS (COST $128,808,778) 122,508,868 ----------- LOAN ASSIGNMENTS -- 1.1% RUSSIA -- 1.1% USD 5,500,000 Russia Vnesh Restructured Loan Agreements* 1,299,375 ----------- TOTAL LOAN ASSIGNMENTS (COST $3,541,183) 1,299,375 ----------- PRINCIPAL AMOUNT ---------- CALL OPTIONS PURCHASED -- 0.0% OPTIONS ON CURRENCY -- 0.0% USD 8,848,000 Euro, Expires 5/03/00, Strike 1.12 1,770 ----------- OPTIONS ON FUTURES -- 0.0% USD 730,000 Eurodollar, Expires 3/13/00, Strike 93.75 40,150 ----------- TOTAL CALL OPTIONS PURCHASED (COST $218,059) 41,920 ----------- PUT OPTIONS PURCHASED -- 0.6% CROSS CURRENCY OPTIONS -- 0.0% EUR 16,300,000 Euro Put/Swiss Franc Call, Expires 6/05/00, Strike 1.58485 23,540 ----------- OPTIONS ON CURRENCY -- 0.6% USD 8,453,000 Euro, Expires 5/03/00, Strike 1.07 746,400 ----------- TOTAL PUT OPTIONS PURCHASED (COST $361,816) 769,940 -----------
See accompanying notes to the financial statements. 3 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- RIGHTS AND WARRANTS -- 0.0% MEXICO -- 0.0% 11,078,000 United Mexican States Warrants, Expires 6/30/03** -- ----------- NIGERIA -- 0.0% 987 Central Bank of Nigeria Warrants, Expires 11/15/20** -- ----------- TOTAL RIGHTS AND WARRANTS (COST $0) -- ----------- PAR VALUE - ------------------ SHORT-TERM INVESTMENTS -- 1.3% COMMERCIAL PAPER -- 1.1% USD 1,400,000 Koch Industries Inc., 5.83%, due 3/01/00 1,400,000 ----------- REPURCHASE AGREEMENT -- 0.2% USD 205,543 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/01/00. with a maturity value of $205,571 and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest, of $209,654. 205,543 ----------- TOTAL SHORT-TERM INVESTMENTS (COST $1,605,543) 1,605,543 ----------- TOTAL INVESTMENTS -- 104.9% (Cost $134,535,379) 126,225,646 Other Assets and Liabilities (net) -- (4.9%) (5,949,473) ----------- TOTAL NET ASSETS -- 100.0% $120,276,173 ===========
See accompanying notes to the financial statements. 4 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000 NOTES TO THE SCHEDULE OF INVESTMENTS: 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. CBO - Collateralized Bond Obligation CPI - Consumer Price Index EMTN - Euromarket Medium Term Note TBA - To Be Announced (Note 1) Variable and Step up rates - The rates shown on variable and step up rate notes are the current interest rates at February 29, 2000, which are subject to change based on the terms of the security, including varying reset dates. CURRENCY ABBREVIATIONS: AUD - Australian Dollar BEF - Belgian Franc CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro FRF - French Franc GBP - British Pound ITL - Italian Lira JPY - Japanese Yen SEK - Swedish Krona USD - United States Dollar (a) Valued by management (Note 1). (b) All or a portion of this security has been segregated to cover collateral requirements on TBA obligations (Note 1). (c) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). * Non-performing. Borrower not currently paying interest. ** Non-income producing security. See accompanying notes to the financial statements. 5 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $134,535,379) (Note 1) $126,225,646 Cash at interest on deposit at brokers (Note 1) 2,558,083 Interest receivable 456,791 Net receivable for open forward foreign currency contracts (Notes 1 and 6) 278,855 Receivable for variation margin on open futures contracts (Notes 1 and 6) 52,063 Receivable for open swap contracts (Notes 1 and 6) 945,587 Receivable for expenses waived or borne by Manager (Note 2) 6,207 ------------ Total assets 130,523,232 ------------ LIABILITIES: Payable for forward commitment (Note 1) 9,509,375 Payable to affiliate for (Note 2): Management fee 23,755 Shareholder service fee 14,168 Interest payable for open swap contracts (Notes 1 and 6) 655,788 Accrued expenses 43,973 ------------ Total liabilities 10,247,059 ------------ NET ASSETS $120,276,173 ============ NET ASSETS CONSIST OF: Paid-in capital $127,486,320 Accumulated undistributed net investment income 2,497,480 Accumulated net realized loss (2,448,254) Net unrealized depreciation (7,259,373) ------------ $120,276,173 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $120,276,173 ============ SHARES OUTSTANDING: Class III 12,472,150 ============ NET ASSET VALUE PER SHARE: Class III $ 9.64 ============
6 See accompanying notes to the financial statements. GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $ 8,039,245 Dividends 132,700 ----------- Total income 8,171,945 ----------- EXPENSES: Management fee (Note 2) 309,352 Custodian and transfer agent fees 67,181 Audit fees 47,519 Interest expense (Notes 1 and 6) 16,266 Legal fees 3,025 Registration fees 2,049 Trustees fees (Note 2) 1,221 Miscellaneous 1,923 Fees waived or borne by Manager (Note 2) (122,918) ----------- 325,618 Shareholder service fee (Note 2) Class III 185,609 ----------- Net expenses 511,227 ----------- Net investment income 7,660,718 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (2,043,084) Closed futures contracts 1,793,795 Closed swap contracts (5,053,737) Written options 420,000 Foreign currency, forward contracts and foreign currency related transactions 1,427,390 ----------- Net realized loss (3,455,636) ----------- Change in net unrealized appreciation (depreciation) on: Investments (4,528,016) Open futures contracts (892,945) Open swap contracts 3,491,039 Written options (102,144) Foreign currency, forward contracts and foreign currency related transactions 725,741 ----------- Net unrealized loss (1,306,325) ----------- Net realized and unrealized loss (4,761,961) ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,898,757 ===========
See accompanying notes to the financial statements. 7 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 7,660,718 $ 13,927,844 Net realized loss (3,455,636) (4,990,111) Change in net unrealized appreciation (depreciation) (1,306,325) (6,000,013) ------------ ------------ Net increase in net assets from operations 2,898,757 2,937,720 ------------ ------------ Distributions to shareholders from: Net investment income Class III (8,388,446) (2,920,291) ------------ ------------ Total distributions from net investment income (8,388,446) (2,920,291) ------------ ------------ Net realized gains Class III (1,232,734) (5,164,180) ------------ ------------ Total distributions from net realized gains (1,232,734) (5,164,180) ------------ ------------ (9,621,180) (8,084,471) ------------ ------------ Net share transactions: (Note 5) Class III (16,704,303) (79,536,376) ------------ ------------ Decrease in net assets resulting from net share transactions (16,704,303) (79,536,376) ------------ ------------ Total decrease in net assets (23,426,726) (84,683,127) NET ASSETS: Beginning of period 143,702,899 228,386,026 ------------ ------------ End of period (including accumulated undistributed net investment income of $2,497,480 and $3,289,449, respectively) $120,276,173 $143,702,899 ============ ============
8 See accompanying notes to the financial statements. GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ----------------------------- 2000 1999 1998* -------- -------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.23 $ 10.60 $ 10.00 -------- -------- -------- Income from investment operations: Net investment income 0.62+ 0.64+ 0.55+ Net realized and unrealized gain (loss) (0.40) (0.58) 0.66 -------- -------- -------- Total from investment operations 0.22 0.06 1.21 -------- -------- -------- Less distributions to shareholders: From net investment income (0.70) (0.12) (0.27) From net realized gains (0.11) (0.31) (0.34) -------- -------- -------- Total distributions (0.81) (0.43) (0.61) -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.64 $ 10.23 $ 10.60 ======== ======== ======== TOTAL RETURN(a) 2.26% 0.44% 12.16%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $120,276 $143,703 $228,386 Net operating expenses to average daily net assets 0.40% 0.40% 0.40%** Interest expense to average daily net assets 0.01% -- -- Total net expenses to average daily net assets 0.41%(b) -- -- Net investment income to average daily net assets 6.19% 5.97% 6.05%** Portfolio turnover rate 40% 113% 58% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.03 $ 0.02
(a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Interest expense incurred as a result of entering into reverse repurchse agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. + Calculated using average shares outstanding throughout the period. ++ Not annualized. * For the period from April 30, 1997 (commencement of operations) to February 28, 1998. ** Annualized. See accompanying notes to the financial statements. 9 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO U.S. Bond/Global Alpha A Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks a high total return relative to its performance benchmark through investment in U.S. investment grade securities. The Fund achieves exposure to international bond and currency markets by investing in a combination of foreign bond and currency derivatives, effectively adding to or subtracting from the U.S. bond return the performance of the Funds international bond and currency investments. The Funds benchmark is the Lehman Brothers Aggregate Bond Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. 10 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market-makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. At February 29, 2000, the total value of these securities represented 44% of net assets. Included in this total are U.S. Government backed securities and highly rated collateralized debt obligations that represent 38% of net assets at February 29, 2000. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FUTURES CONTRACTS The Fund may use futures contracts to manage its exposure to the bond and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. Gains or losses are recognized but 11 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000 FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 29, 2000. OPTIONS The Fund may write call and put options on securities or currencies it owns or in which it may invest. Writing put options tends to increase the Funds exposure to the underlying instrument. Writing call options tends to decrease the Funds exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying 12 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 29, 2000, the Fund had no written option contracts outstanding. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. The risk associated with purchasing put and call options is limited to the premium paid. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. Direct indebtedness of emerging countries involves a risk that the governmental entities responsible for the repayment of the debt may be unable or unwilling to pay the principal and interest when due. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. 13 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Credit default swaps involve the payment of a specified rate based on the notional amount. The Fund receives payment upon a default of the underlying security. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral, which is paid by the counterparty. At February 29, 2000, $2,558,083 in cash has been set aside. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform and that there may be unfavorable changes in the fluctuation of interest rates. See Note 6 for a summary of open swap agreements as of February 29, 2000. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. 14 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund has sold may decline below the contractual repurchase price under the agreement. During the year ended February 29, 2000, the Fund had entered into reverse repurchase agreements with an average balance outstanding of $2,145,200 and an average interest rate of 5.69%. The maximum balance outstanding was $2,955,000. The average shares outstanding were 12,418,901 and the average balance per share outstanding was $0.17. Average balance outstanding was calculated based on daily balances outstanding during the period the Fund had entered into reverse repurchase agreements. At February 29, 2000, there were no open reverse repurchase agreements. DELAYED DELIVERY COMMITMENTS The Fund may purchase or sell securities on a when-issued or forward commitment basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Collateral consisting of liquid securities or cash and cash equivalents is maintained in an amount at least equal to these commitments with the custodian. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund had no securities on loan. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. 15 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to Section 988 gains. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $(64,241) $55,818 $(8,423)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. Dividend income is recorded on the ex-dividend date. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in principal or face amount of these securities is recorded as interest income. 16 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .15% of the amount invested. The premium will be reduced by 50% with respect to any portion of a purchase that is offset by a corresponding redemption occurring on the same day. In addition, the purchase premium for the Fund will be reduced by 50% if the purchaser makes an in-kind purchase of Fund shares or if the purchase or redemption is part of a transfer from or to another Fund where the Manager is able to transfer securities among the Funds to effect the transaction. All purchase premiums are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $22,790 in purchase premiums. There is no premium for redemptions or reinvested distributions. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. 17 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Prior to March 1, 1999, GMO earned a management fee at the annual rate of .40% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes and interest expense), shareholder service fees and extraordinary expenses) exceeded .25% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $1,221. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES For the year ended February 29, 2000 cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Sales ----------- ----------- U.S. Government securities $ 9,509,375 $ -- Investments (non-U.S. Government securities) 45,883,406 65,644,935
At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $134,506,675 $764,301 $(9,045,330) $(8,281,029)
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 45.29% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. 18 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ------------------------ ------------------------- Shares Amount Shares Amount Class III: ---------- ------------ ----------- ------------ Shares sold 1,559,385 $ 15,511,210 7,957,888 $ 84,927,873 Shares issued to shareholders in reinvestment of distributions 681,181 6,580,233 596,366 6,299,415 Shares repurchased (3,816,348) (38,795,746) (16,055,030) (170,763,664) ---------- ------------ ----------- ------------ Net decrease (1,575,782) $(16,704,303) (7,500,776) $(79,536,376) ========== ============ =========== ============
19 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- --------------- ----------------- ------------- -------------- Buys 3/10/00 CAD 18,800,000 $12,959,827 $ 175,060 3/23/00 EUR 9,200,000 8,872,572 (326,213) 3/03/00 GBP 9,400,000 14,839,601 (233,691) 4/21/00 JPY 10,000,000 91,858 936 --------- $(383,908) ========= Sales 4/28/00 AUD 5,800,000 $ 3,564,697 $ 67,698 3/10/00 CAD 2,200,000 1,516,575 4,660 3/23/00 EUR 8,300,000 8,004,603 352,845 3/03/00 GBP 9,400,000 14,839,602 211,738 5/05/00 GBP 4,000,000 6,314,136 3,244 4/21/00 JPY 570,000,000 5,235,883 62,106 --------- $ 702,291 =========
FORWARD CROSS CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Units of Currency Receive/In Exchange For (Depreciation) ---------- -------------------------- ------------------------ -------------- 4/14/00 CHF 12,999,488 EUR 8,100,000 (5,274) 4/14/00 EUR 2,400,000 CHF 3,849,528 255 4/07/00 SEK 19,726,755 EUR 2,300,000 (34,509) -------- $(39,528) ========
20 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Expiration Contract Appreciation Contracts Type Date Value (Depreciation) --------- ------------------------------------ -------------- ------------- -------------- Buys 5 Australian Government Bond 10 Yr. March 2000 $ 425,312 $ 12,252 9 Australian Government Bond 3 Yr. March 2000 634,939 (3,321) 20 Canadian Government Bond 10 Yr. June 2000 1,357,409 3,690 9 Japanese Government Bond 10 Yr. March 2000 10,827,363 (3,618) 208 Swiss Government Bond 10 Yr. March 2000 14,748,502 (262,423) --------- $(253,420) ========= Sales 42 Euro Bund 10 Yr. March 2000 $ 4,194,177 $ 15,646 9 Japanese Government Bond 10 Yr. March 2000 10,824,086 600 10 Japanese Government Bond 10 Yr. June 2000 11,908,425 1,947 48 U.K. Gilt 10 Yr. June 2000 8,463,634 47,903 45 U.S. Treasury Bond 20 Yr. June 2000 4,260,938 20,574 250 U.S. Treasury Note 10 Yr. June 2000 23,847,656 49,157 55 U.S. Treasury Note 5 Yr. June 2000 5,340,156 (41,494) --------- $ 94,333 =========
February 29, 2000, the Fund has sufficient cash and/or securities to cover any commitments or margin on these contracts. 21 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- WRITTEN OPTION TRANSACTIONS
Puts Calls Principal Amount Principal Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ---------------- -------------- ---------------- -------------- Outstanding, beginning of period 5,600 $ 352,464 5,600 $ 420,000 Options written -- -- -- -- Options closed -- -- -- -- Options exercised (5,600) (352,464) -- -- Options expired -- -- (5,600) (420,000) Options sold -- -- -- -- ------- ---------- ------- ---------- Outstanding, end of period -- $ -- -- $ -- ======= ========== ======= ==========
SWAP AGREEMENTS
Net Unrealized Notional Amount Appreciation Fund Expiration Date Description (Depreciation) -------------------------- --------------- -------------------------------------------------- -------------- CREDIT DEFAULT SWAPS 378,000,000,000 ITL 3/31/03 Agreement with Morgan Guaranty Trust Company dated $ (206,417) 3/26/98 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Italy, the notional amount times the difference between the par value and the then-market value of Italy BTP, 6.00% due 11/01/07.
22 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Amount Appreciation Fund Expiration Date Description (Depreciation) -------------------------- --------------- -------------------------------------------------- -------------- 7,922,250,000 BEF 3/31/03 Agreement with Morgan Guaranty Trust Company dated $ (244,309) 3/26/98 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Belgium, the notional amount times the difference between the par value and the then-market value of Kingdom of Belgium, 5.75% due 3/28/08. INTEREST RATE SWAPS 11,200,000 CHF 6/05/05 Agreement with Morgan Guaranty Trust Company dated 173,254 6/03/98 to pay the notional amount multiplied by 3.245% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 15,000,000 CHF 6/10/05 Agreement with Credit Suisse Financial Products 228,871 dated 6/08/98 to pay the notional amount multiplied by 3.2625% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread.
23 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Amount Appreciation Fund Expiration Date Description (Depreciation) -------------------------- --------------- -------------------------------------------------- -------------- 19,200,000 CHF 6/10/05 Agreement with Credit Suisse Financial Products 539,465 dated 10/01/98 to pay the notional amount multiplied by 3.2625% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 10,600,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust Company dated $ 167,412 6/09/98 to pay the notional amount multiplied by 3.245% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 3,300,000 CHF 9/16/05 Agreement with Morgan Guaranty Trust Company dated 69,452 9/14/98 to pay the notional amount multiplied by 3.1175% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 14,000,000 USD 7/29/06 Agreement with Morgan Guaranty Trust Company dated (496,511) 7/27/99 to receive the notional amount multiplied by 6.664% and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread.
24 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- (CONTINUED)
Net Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) -------------------------- ---------- -------------------------------------------------- -------------- 14,000,000 SEK 9/13/06 Agreement with UBS AG dated 9/09/99 to receive the $ 6,486 notional amount multiplied by 6.465% and to pay the notional amount multiplied by 3 month Floating Rate Swedish LIBOR adjusted by a specified spread. TOTAL RETURN SWAPS 75,000,000 USD 11/12/00 Agreement with Morgan Guaranty Trust Company dated 678,995 11/09/98 to receive (pay) the notional amount multiplied by the return on the Lehman Aggregate Index and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread.+ 9,838,021 USD/ 10,000,000 USD 2/25/01 Agreement with UBS AG dated 1/12/00 to receive 28,889 (pay) the notional amount multiplied by the change in market value (including accrued interest) of Federal National Mortgage Association TBA 30 Year 7.50% and to pay the initial market value multiplied by 1 month LIBOR adjusted by a specified spread. ----------- $ 945,587 ===========
See Notes to Schedule of Investments for definitions of currency abbreviations. + This swap agreement is valued by management (Note 1). 25 FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- The Fund has elected to defer to March 1, 2000 post October losses of $303,603. At February 29, 2000, the Fund had a capital loss carryforward available to offset future capital gains, if any, of the following amount:
Year of Expiration Amount ------------------ ---------- 2008 $1,396,650
26 GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO U.S. Bond/Global Alpha A Fund returned 2.3% for the fiscal year ended February 29, 2000, compared to 1.1% for the Lehman Brothers Aggregate Bond Index. Consistent with the Fund's investment objectives and policies, the Fund was substantially invested in investment-grade, foreign and domestic fixed income instruments throughout the period. Although the Fund is benchmarked against a domestic bond index, the value added is derived from global bond and currency strategies. The Fund outperformed the benchmark during the fiscal year by 1.2%. Currency and emerging country debt selection added value during the fiscal year, while bond market and issue selection were negative and reduced portfolio return. Long bond yields increased by 20 to 200 basis points in developed countries, except in Japan where yields declined by 60 basis points. Other than in Japan, bond market returns were negative across the international bond universe. The U.S. dollar appreciated against European currencies, but declined against the Japanese yen, Canadian dollar and Australian dollar. Bond market selection during the fiscal year was hurt by an underweight position in Japanese bonds. These losses were offset to some extent by returns on an underweight position in Swiss bonds. Currency selection added modest value during the fiscal year. An overweight position in Canadian dollars and underweight positions in Japanese yen and Swiss francs added value, but were offset to some extent by losses on an overweight position in British pounds. Emerging country debt exposure added more than 250 basis points during the fiscal year, with much of it concentrated in the second half of the fiscal year. Sovereign spreads on the J.P. Morgan Emerging Markets Bond Index Plus declined from 1330 to end the fiscal year at 816 basis points. OUTLOOK The Fund is structured to benefit from outperformance in the Australian, Canadian, EMU member countries, New Zealand, Swedish, U.S. and emerging bond markets. We expect the Danish, Japanese, Swiss and British bond markets to underperform. Our strategy maintains a market duration in each country. Strong relative performance is expected from Canadian dollars, Euros and Swiss francs. The Australian dollar, Danish krone, Japanese yen, Swedish krona, British pound and U.S. dollar are expected to underperform. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO U.S. BOND/GLOBAL ALPHA A FUND CLASS III SHARES AND THE LEHMAN BROTHERS AGGREGATE BOND INDEX AS OF FEBRUARY 29, 2000 Average Annual Total Returns Inception 4/30/97 1yr 5yr 10yr (ITD) 2.1 N/A 5.06
[GRAPH]
Date GMO US Bond/Global Alpha A Fund-III Lehman Brothers Aggregate Bond 4/30/97 9985 10000 6/30/97 10235 10214 9/30/97 10754 10554 12/31/97 11178 10864 3/31/98 11315 11033 6/30/98 11453 11285 9/30/98 11626 11762 12/31/98 11611 11802 3/31/99 11336 11743 6/30/99 11270 11640 9/30/99 11259 11719 12/31/99 11335 11705 2/29/00 11502 11807
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 15 bp on the purchase. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO U.S. Bond/Global Alpha B Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 13, 2000 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 15.7% BRAZIL -- 1.3% USD 10,000,000 Brazil Discount Bond, Principal Strip, 0.00%, due 04/15/24(a) 1,992,001 ----------- BULGARIA -- 0.6% USD 5,000,000 Bulgaria Discount Strips, 0.00%, due 07/28/24(a) 982,612 ----------- CAYMAN ISLANDS -- 2.2% CAD 1,000,000 Government of Canada (Cayman), 7.25%, due 06/01/08 716,747 USD 3,000,000 Pemex Finance Ltd. Series 1A1 Class A2, 144A, 6.30%, due 05/15/10 2,676,000 ----------- 3,392,747 ----------- CHILE -- 0.4% USD 750,000 Banco Santander, Series MBIA, 6.50%, due 11/01/05 700,125 ----------- SWEDEN -- 0.2% SEK 2,500,000 Kingdom of Sweden, 6.00%, due 02/09/05 288,668 ----------- UNITED STATES -- 11.0% U.S. GOVERNMENT -- 2.5% USD 10,100,000 U.S. Treasury 0.00% Receipts, due 08/15/13(a) 3,956,225 ----------- U.S. GOVERNMENT AGENCY -- 8.5% USD 4,000,000 Federal Home Loan Bank, Variable Rate, CPI + 3.15%, 5.59%, due 02/15/02(b) 3,892,360 USD 10,000,000 Government National Mortgage Association, TBA, 7.00% 9,571,875 ----------- 13,464,235 ----------- TOTAL UNITED STATES 17,420,460 ----------- TOTAL DEBT OBLIGATIONS (COST $25,734,215) 24,776,613 -----------
See accompanying notes to the financial statements. 1 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- MUTUAL FUND -- 88.8% 5,551,640 GMO Alpha Libor Fund (c) 140,400,980 ----------- TOTAL MUTUAL FUND (COST $138,809,202) 140,400,980 ----------- PRINCIPAL AMOUNT ------------- CALL OPTIONS PURCHASED -- 0.0% OPTIONS ON CURRENCY -- 0.0% USD 5,712,000 Euro, Expires 5/03/00, Strike 1.12 1,142 ----------- OPTIONS ON FUTURES -- 0.0% USD 480,000 Eurodollar, Expires 3/13/00, Strike 93.75 26,400 ----------- TOTAL CALL OPTIONS PURCHASED (COST $141,109) 27,542 ----------- PUT OPTIONS PURCHASED -- 0.3% CROSS CURRENCY OPTIONS -- 0.0% EUR 10,200,000 Euro Put/Swiss Franc Call, Expires 6/05/00, Strike 1.58485 14,731 ----------- OPTIONS ON CURRENCY -- 0.3% USD 5,457,000 Euro, Expires 5/03/00, Strike 1.07 481,853 ----------- TOTAL PUT OPTIONS PURCHASED (COST $230,781) 496,584 -----------
2 See accompanying notes to the financial statements. GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 0.9% COMMERCIAL PAPER -- 0.8% USD 1,200,000 Koch Industries Inc., 5.83%, due 3/01/00 1,200,000 ----------- REPURCHASE AGREEMENT -- 0.1% USD 227,254 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $227,285 and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest, of $231,799. 227,254 ----------- TOTAL SHORT-TERM INVESTMENTS (COST $1,427,254) 1,427,254 ----------- TOTAL INVESTMENTS -- 105.7% (Cost $166,342,561) 167,128,973 Other Assets and Liabilities (net) -- (5.7%) (8,975,439) ----------- TOTAL NET ASSETS -- 100.0% $158,153,534 ===========
See accompanying notes to the financial statements. 3 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000 NOTES TO THE SCHEDULE OF INVESTMENTS: 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. CPI - Consumer Price Index TBA - To Be Announced (Note 1) Variable and Step up rates - The rates shown on variable and step up rate notes are the current interest rates at February 29, 2000, which are subject to change based on the terms of the security, including varying reset dates. CURRENCY ABBREVIATIONS: AUD - Australian Dollar BEF - Belgian Franc CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - British Pound ITL - Italian Lira JPY - Japanese Yen SEK - Swedish Krona USD - United States Dollar (a) Valued by management (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). (c) All or a portion of this security has been segregated to cover collateral requirements on TBA obligations (Note 1). 4 See accompanying notes to the financial statements. GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $166,342,561) (Note 1) $167,128,973 Cash at interest on deposit at brokers (Note 1) 434,093 Interest receivable 72,347 Receivable for variation margin on open futures contracts (Notes 1 and 6) 9,949 Receivable for open swap contracts (Notes 1 and 6) 294,975 Receivable for expenses waived or borne by Manager (Note 2) 1,846 Miscellaneous receivable 67,114 ------------ Total assets 168,009,297 ------------ LIABILITIES: Payable for forward commitment (Note 1) 9,509,375 Payable to affiliate for (Note 2): Management fee 24,894 Shareholder service fee 18,669 Net payable for open forward foreign currency contracts (Notes 1 and 6) 249,500 Interest payable for open swap contracts (Notes 1 and 6) 15,175 Accrued expenses 38,150 ------------ Total liabilities 9,855,763 ------------ NET ASSETS $158,153,534 ============ NET ASSETS CONSIST OF: Paid-in capital $166,646,324 Accumulated undistributed net investment income 624,162 Accumulated net realized loss (9,961,355) Net unrealized appreciation 844,403 ------------ $158,153,534 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $158,153,534 ============ SHARES OUTSTANDING: Class III 22,907,101 ============ NET ASSET VALUE PER SHARE: Class III $ 6.90 ============
See accompanying notes to the financial statements. 5 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest (including securities lending income of $1,973) $ 8,480,593 ----------- Total income 8,480,593 ----------- EXPENSES: Management fee (Note 2) 317,901 Custodian and transfer agent fees 84,594 Audit fees 36,941 Interest expense (Notes 1 and 6) 13,589 Legal fees 5,527 Registration fees 2,078 Trustees fees (Note 2) 1,648 Miscellaneous 2,374 Fees waived or borne by Manager (Note 2) (133,162) ----------- 331,490 SHAREHOLDER SERVICE FEE (NOTE 2) Class III 238,423 ----------- Net expenses 569,913 ----------- Net investment income 7,910,680 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (6,215,579) Closed futures contracts 102,885 Closed swap contracts (3,903,958) Written options 45,000 Foreign currency, forward contracts and foreign currency related transactions (125,268) ----------- Net realized loss (10,096,920) ----------- Change in net unrealized appreciation (depreciation) on: Investments 1,438,944 Open futures contracts 84,241 Open swap contracts 1,005,264 Written options (10,944) Foreign currency, forward contracts and foreign currency related transactions (136,130) ----------- Net unrealized gain 2,381,375 ----------- Net realized and unrealized loss (7,715,545) ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 195,135 ===========
6 See accompanying notes to the financial statements. GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 7,910,680 $ 10,596,718 Net realized gain (loss) (10,096,920) 514,377 Change in net unrealized appreciation (depreciation) 2,381,375 (2,439,559) ------------ -------------- Net increase in net assets from operations 195,135 8,671,536 ------------ -------------- Distributions to shareholders from: Net investment income Class III (6,265,992) (15,078,084) ------------ -------------- Total distributions from net investment income (6,265,992) (15,078,084) ------------ -------------- In excess of net investment income Class III -- (3,785,552) ------------ -------------- Total distributions in excess of net investment income -- (3,785,552) ------------ -------------- Net realized gains Class III -- (1,159,070) ------------ -------------- Total distributions from net realized gains -- (1,159,070) ------------ -------------- In excess of net realized gains Class III -- (1,427,853) ------------ -------------- Total distributions in excess of net realized gains -- (1,427,853) ------------ -------------- (6,265,992) (21,450,559) ------------ -------------- Net share transactions: (Note 5) Class III 26,078,151 (229,679,318) ------------ -------------- Increase (decrease) in net assets resulting from net share transactions 26,078,151 (229,679,318) ------------ -------------- Total increase (decrease) in net assets 20,007,294 (242,458,341) NET ASSETS: Beginning of period 138,146,240 380,604,581 ------------ -------------- End of period (including accumulated undistributed net investment income of $624,162 and distributions in excess of net investment income of $873,945, respectively) $158,153,534 $ 138,146,240 ============ ==============
See accompanying notes to the financial statements. 7 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ---------------------------------- 2000 1999 1998** -------- -------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 7.18 $ 10.14 $ 10.00 -------- -------- -------- Income from investment operations: Net investment income(a) 0.35+ 0.59+ 0.35+ Net realized and unrealized gain (loss) (0.34) (0.19) 0.06 -------- -------- -------- Total from investment operations 0.01 0.40 0.41 -------- -------- -------- Less distributions to shareholders: From net investment income (0.29) (2.36)(b) (0.21) In excess of net investment income -- (0.59)(b) -- From net realized gains -- (0.18) (0.06) In excess of net realized gains -- (0.23) -- -------- -------- -------- Total distributions (0.29) (3.36) (0.27) -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 6.90 $ 7.18 $ 10.14 ======== ======== ======== TOTAL RETURN(c) 0.27% 3.42% 4.15%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $158,154 $138,146 $380,605 Net operating expenses to average daily net assets 0.35% 0.35% 0.35%* Interest expense to average daily net assets 0.01% -- -- Total net expenses to average daily net assets 0.36%(d) 0.35% 0.35%* Net investment income to average daily net assets(a) 4.98% 5.96% 5.88%* Portfolio turnover rate 94% 134% 27% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.03 $ 0.02
(a) Net investment income for the year ending February 29, 2000, is affected by the timing of the declaration of dividends by other Funds of the Trust in which the Fund invests. (b) The amount shown for a share outstanding does not correspond with the aggregate distributions to shareholders for the year ended February 28, 1999 due to the timing of purchases and redemptions of Fund shares in relationto the declaration of distributions to shareholders. (c) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (d) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. + Computed using average shares outstanding throughout the period. ++ Not annualized. * Annualized. ** Period from July 29, 1997 (commencement of operations) to February 28, 1998. 8 See accompanying notes to the financial statements. GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO U.S. Bond/Global Alpha B Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks a high total return relative to its performance benchmark through investment in U.S. investment grade securities. The Fund achieves exposure to international bond and currency markets by investing in a combination of foreign bond and currency derivatives, effectively adding to or subtracting from the U.S. bond return the performance of the Fund's international bond and currency investments. The Fund's benchmark is the Lehman Brothers Aggregate Bond Index. At February 29, 2000, 88.8% of the Fund is invested in GMO Alpha Libor Fund, a separate fund of GMO Trust managed by GMO. Alpha Libor invests primarily in relatively high quality, low volatility fixed income securities. The financial statements of the GMO Alpha Libor Fund should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which 9 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- approximates market value. Shares of other Funds of the Trust are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market-makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FUTURES CONTRACTS The Fund may use futures contracts to manage its exposure to the bond and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and 10 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 29, 2000. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, 11 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 29, 2000 the Fund had no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. The risk associated with purchasing put and call options is limited to the premium paid. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Credit default swaps involve the payment of a specified rate based on the notional amount. The Fund receives payment upon a default of the underlying security. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral, which is paid by the counterparty. At February 29, 2000, $434,093 in cash has been set aside. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments 12 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform and that there may be unfavorable changes in the fluctuation of interest rates. See Note 6 for a summary of open swap agreements as of February 29, 2000. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund was sold may decline below the contractual repurchase price under the agreement. During the year ended February 29, 2000, the Fund had entered into reverse repurchase agreements with an average balance outstanding of $1,949,000 and an average interest rate of 5.70%. The maximum balance outstanding was $1,949,000. The average shares outstanding were 21,989,122 and the average balance per share outstanding was $0.09. Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund had entered into reverse repurchase agreements. At February 29, 2000, the Fund had no open reverse repurchase agreements. 13 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- DELAYED DELIVERY COMMITMENTS The Fund may purchase or sell securities on a when-issued or forward commitment basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Collateral consisting of liquid securities or cash and cash equivalents is maintained in an amount at least equal to these commitments with the custodian. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund had no securities on loan. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to section 988 gains. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable 14 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $(146,581) $146,987 $(406)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. Dividend income is recorded on the ex-dividend date. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in principal or face amount of these securities is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .15% of the amount invested. The premium will be reduced by 50% with respect to any portion of a purchase that is offset by a corresponding redemption occurring on the same day. In addition, the purchase premium for this Fund will be reduced by 50% if the purchaser makes an in-kind purchase of Fund shares or if the purchase or redemption is part of a transfer from or to another Fund where the Manager is able to transfer securities among the Funds to effect the transaction. All purchase premiums are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $45,205 in purchase premiums. There is no premium for redemptions or reinvested distributions. 15 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .20% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at an annual rate of .40% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeded .20% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $1,648. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES For the year ended February 29, 2000 cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Sales ------------ ------------ U.S. Government securities $ 9,509,375 $ 1,516,641 Investments (non-U.S. Government securities) 188,452,580 157,558,911
16 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- During the year ended February 29, 2000, the Fund exchanged securities with a market value of $135,809,200 for shares of GMO Alpha Libor Fund with a value equal to that market value in taxable transactions. Such amounts are included in purchase and sales above. At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $166,342,561 $2,176,075 $ (1,389,663) $786,412
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 98.3% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Funds outstanding shares. Investment activities of these shareholders could have a material effect. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ------------------------- --------------------------- Shares Amount Shares Amount Class III: ----------- ------------ ------------ ------------- Shares sold 4,187,339 $ 30,136,852 18,651,438 $ 158,378,340 Shares issued to shareholders in reinvestment of distributions 921,469 6,265,992 2,639,708 20,620,609 Shares repurchased (1,452,339) (10,324,693) (39,582,432) (408,678,267) ----------- ------------ ------------ ------------- Net increase (decrease) 3,656,469 $ 26,078,151 (18,291,286) $(229,679,318) =========== ============ ============ =============
17 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Deliver/ Units Appreciation Date Receive of Currency Value (Depreciation) ---------- --------------------------------------------- ------------ ----------- -------------- Buys 3/10/00 CAD 12,100,000 $ 8,341,165 $ 112,671 3/23/00 EUR 9,200,000 8,872,572 (268,621) 3/3/00 GBP 8,400,000 13,260,920 (338,980) --------- $(494,930) ========= Sales 4/28/00 AUD 3,300,000 $ 2,028,190 $ 38,518 3/10/00 CAD 1,300,000 896,158 3,510 3/23/00 EUR 1,700,000 1,639,497 25,385 3/3/00 GBP 8,400,000 13,260,920 169,166 5/5/00 GBP 1,300,000 2,052,094 1,055 4/21/00 JPY 380,000,000 3,490,589 41,403 --------- $ 279,037 =========
FORWARD CROSS CURRENCY CONTRACTS
Settlement Date Deliver/Units of Currency Receive/In Exchange For ---------- ----------------------------------------------------- ---------------------------------------------------- 4/14/00 CHF 5,617,063 EUR 3,500,000 4/14/00 EUR 1,700,000 CHF 2,726,749 4/7/00 SEK 18,011,385 EUR 2,100,000 Net Unrealized Settlement Appreciation Date (Depreciation) ---------- -------------- 4/14/00 $ (2,279) 4/14/00 180 4/7/00 (31,508) -------- $(33,607) ========
18 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Number of Expiration Contract Contracts Type Date Value --------- --------------------------------------------- --------------------------------------------- ----------- Buys 42 Australian Government Bond 10 Yr. March 2000 $3,572,622 4 Canadian Government Bond 10 Yr. June 2000 271,482 26 Euro Bund 10 Yr. March 2000 2,596,395 6 Japanese Government Bond 10 Yr. March 2000 7,218,242 5 Swiss Government Bond 10 Yr. March 2000 354,531 16 U.S. Treasury Note 20 Yr. June 2000 1,526,250 Sales 5 Australian Government Bond 3 Yr. March 2000 $ 352,744 6 Japanese Government Bond 10 Yr. March 2000 7,216,057 7 Japanese Government Bond 10 Yr. June 2000 8,335,897 25 U.K. Gilt 10 Yr. June 2000 4,408,143 32 U.S. Treasury Bond 20 Yr. June 2000 3,030,000 Net Unrealized Number of Appreciation Contracts (Depreciation) --------- -------------- Buys 42 $32,770 4 738 26 (19,107) 6 (2,412) 5 (2,160) 16 (2,417) ------- $ 7,412 ======= Sales 5 $ 1,679 6 (25,483) 7 1,333 25 11,845 32 17,542 ------- $ 6,916 =======
At February 29, 2000, the Fund has sufficient cash and/or securities to cover any commitments or margin on these contracts. WRITTEN OPTION TRANSACTIONS
Puts Calls Principal Amount Principal Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ---------------- ------------ ---------------- ------------ Outstanding, beginning of period 600 $ 37,764 600 $ 45,000 Options written -- -- -- -- Options closed -- -- -- -- Options exercised (600) (37,764) -- -- Options expired -- -- (600) (45,000) ------ -------- ------ -------- Outstanding, end of period -- $ -- -- $ -- ====== ======== ====== ========
19 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS
Notional Net Unrealized Amount Expiration Appreciation Fund Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- CREDIT DEFAULT SWAPS 49,000,000,000 ITL 3/31/03 Agreement with Morgan Guaranty Trust Company dated $ (26,758) 3/26/98 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Italy, the notional amount times the difference between the par value and the then-market value of Italy BTP, 6.00% due 11/01/07. 1,058,750,000 BEF 3/31/03 Agreement with Morgan Guaranty Trust Company dated (32,650) 3/26/98 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Belgium, the notional amount times the difference between the par value and the then-market value of Kingdom of Belgium, 5.75% due 3/28/08. INTEREST RATE SWAPS 5,000,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust Company dated 78,969 6/09/98 to pay the notional amount multiplied by 3.245% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 9,000,000 USD 7/29/06 Agreement with Morgan Guaranty Trust Company dated (319,186) 7/27/99 to receive the notional amount multiplied by 6.664% and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread.
20 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Notional Net Unrealized Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 8,000,000 SEK 9/13/06 Agreement with UBS AG dated 9/09/99 to receive the $ 3,707 notional amount multiplied by 6.465% and to pay the notional amount multiplied by 3 month Floating Rate Swedish LIBOR adjusted by a specified spread. 20,000,000 USD 2/07/07 Agreement with Morgan Guaranty Trust Company dated 7,823 2/03/00 to receive the notional amount multiplied 7.395% and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. TOTAL RETURN SWAPS 75,000,000 USD 8/01/00 Agreement with Goldman Sachs International dated 525,293 7/13/99 to receive (pay) the notional amount multiplied by the return on the Lehman Aggregate Index and to pay the notional amount multiplied by 1 month LIBOR adjusted by a specified spread.+ 19,676,042 USD/ 20,000,000 USD 2/25/01 Agreement with UBS AG dated 1/12/00 to receive 57,777 (pay) the notional amount multiplied by the change in market value (including accrued interest) of Federal National Mortgage Association TBA 30 Year 7.50% and to pay the initial market value multiplied by 1 month LIBOR adjusted by a specified spread. --------- $ 294,975 =========
See Notes to the Schedule of Investments for definitions of currency abbreviations. + This swap agreement is valued by management (Note 1). 21 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- The Fund has elected to defer to March 1, 2000 post October losses of $4,702,113. At February 29, 2000, the Fund had a capital loss carryforward available to offset future capital gains, if any, of the following amount:
Year of Expiration Amount ------------------------------------------------------------ ---------- 2008 $4,653,232
22 GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO U.S. Bond/Global Alpha B Fund returned 0.3% for the fiscal year ended February 29, 2000, compared to 1.1% for the Lehman Brothers Aggregate Bond Index. Consistent with the Fund's investment objectives and policies, the Fund was substantially invested in investment-grade, foreign and domestic fixed income instruments throughout the period. Although the Fund is benchmarked against a domestic bond index, the value added is derived from global bond and currency strategies. The Fund underperformed the benchmark during the fiscal year by 0.8%. Currency selection added value during the fiscal year, while bond market and issue selection reduced portfolio return. Long bond yields increased by 20 to 200 basis points in developed countries, except in Japan where yields declined by 60 basis points. Other than in Japan, bond market returns were negative across the international bond universe. The U.S. dollar appreciated against European currencies, but declined against the Japanese yen, Canadian dollar and Australian dollar. Bond market selection during the fiscal year was hurt by an underweight position in Japanese bonds. These losses were offset to some extent by returns due to an underweight position in Swiss bonds. Currency selection added modest value during the fiscal year. An overweight position in Canadian dollars and underweight positions in Japanese yen and Swiss francs added value, but were offset to some extent by losses on an overweight position in British pounds. This Fund is not permitted to purchase emerging country debt. Issue selection was negative. OUTLOOK The Fund is structured to benefit from outperformance in the Australian, Canadian, EMU member countries, New Zealand, Swedish and U.S. bond markets. We expect the Danish, Japanese, Swiss and British bond markets to underperform. Our strategy maintains a market duration in each country. Strong relative performance is expected from Canadian dollars, Euros and Swiss francs. The Australian dollar, Danish krone, Japanese yen, Swedish krona, British pound and U.S. dollar are expected to underperform. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO U.S. BOND/GLOBAL ALPHA B FUND CLASS III SHARES AND THE LEHMAN BROTHERS AGGREGATE BOND INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 7/29/97 1yr 5yr 10yr (ITD) 0.12 N/A 2.96
[GRAPH]
Date GMO US Bond/Global Alpha B Fund-III Lehman Brothers Aggregate Bond 7/29/97 9985 10000 9/30/97 10055 10097 12/31/97 10276 10394 3/31/98 10461 10556 6/30/98 10625 10796 9/30/98 11041 11253 12/31/98 10995 11291 3/31/99 10800 11235 6/30/99 10695 11136 9/30/99 10710 11212 12/31/99 10643 11198 2/29/00 10784 11296
Performance shown is net of all fees after reimbursement form the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 15 bp on the purchase. Transaction fees are retained by the fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Global Bond Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 18, 2000 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 14.8% ARGENTINA -- 0.8% USD 500,000 Republic of Argentina, 12.13%, due 02/25/19 520,500 USD 1,000,000 Republic of Argentina, 12.00%, due 02/01/20 1,033,500 ------------------- 1,554,000 ------------------- BRAZIL -- 1.5% USD 3,500,000 Brazil Discount ZL Bond, Variable Rate, 6 mo. LIBOR + .81%, 6.94%, due 04/15/24 2,734,375 ------------------- BULGARIA -- 0.4% USD 2,000,000 Bulgaria Discount Series B Interest Strips, Basket 2, 0.00%, due 07/28/24 358,000 USD 500,000 Bulgaria FLIRB Series B, Variable Rate, Step Up, 3.25%, due 07/28/12 375,000 ------------------- 733,000 ------------------- CANADA -- 0.9% CAD 2,000,000 Government of Canada Real Return, 4.25%, due 12/01/21 1,624,231 ------------------- ECUADOR -- 0.1% USD 500,000 Republic of Ecuador Par Bond, Variable Rate, Step Up, 4.00%, due 02/28/25* 183,750 ------------------- JORDAN -- 0.2% USD 500,000 Hashemite Kingdom of Jordan Par Bond, Variable Rate, Step Up, 144A, 6.00%, due 12/23/23 338,750 ------------------- MEXICO -- 4.8% FRF 5,000,000 Mexico Par Bond, 6.63%, due 12/31/19 648,575 CHF 20,000,000 Mexico Par Bond, 3.75%, due 12/31/19 8,076,600 ------------------- 8,725,175 ------------------- NEW ZEALAND -- 1.2% NZD 4,500,000 New Zealand Index Linked Bond Series 216, 4.50%, due 02/15/16 2,112,433 ------------------- NIGERIA -- 0.3% USD 706,672 Central Bank of Nigeria Par Bond Odd Lot, Variable Rate, Step Up, 6.25%, due 11/15/20(a) 365,703
See accompanying notes to the financial statements. 1 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- NIGERIA -- CONTINUED USD 500,000 Central Bank of Nigeria Par Bond, Variable Rate, Step Up, 6.25%, due 11/15/20 283,750 ------------------- 649,453 ------------------- SUPRA NATIONAL -- 1.2% AUD 4,600,000 European Bank for Reconstruction and Development, Zero Coupon, due 02/10/28 359,381 GBP 1,000,000 International Bank for Reconstruction and Development, 11.50%, due 11/09/03 1,815,505 ------------------- 2,174,886 ------------------- SWEDEN -- 0.7% SEK 5,000,000 Government of Sweden Index Linked Bond, 4.00%, due 12/01/20 576,708 SEK 6,600,000 Kingdom of Sweden, 6.00%, due 02/09/05 762,083 ------------------- 1,338,791 ------------------- UNITED STATES -- 2.5% STRUCTURED NOTES -- 2.5% USD 5,000,000 Federal Home Loan Bank, Variable Rate, (10.00% - 6 mo. LIBOR), 4.06%, due 09/22/03(b) 4,515,000 ------------------- VENEZUELA -- 0.2% USD 500,000 Republic of Venezuela Discount Bond Series A, Variable Rate, 6 mo. LIBOR + .81%, 7.00%, due 03/31/20 386,250 ------------------- TOTAL DEBT OBLIGATIONS (COST $29,089,508) 27,070,094 ------------------- LOAN ASSIGNMENTS -- 0.3% RUSSIA -- 0.3% USD 2,000,000 Russia Vnesh Restructured Loan Agreements* 472,500 ------------------- TOTAL LOAN ASSIGNMENTS (COST $1,278,948) 472,500 ------------------- MUTUAL FUND -- 85.1% 6,146,875 GMO Alpha Libor Fund 155,454,468 ------------------- TOTAL MUTUAL FUND (COST $153,671,874) 155,454,468 -------------------
See accompanying notes to the financial statements. 2 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PRINCIPAL AMOUNT DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ CALL OPTIONS PURCHASED -- 0.0% OPTIONS ON CURRENCY -- 0.0% USD 13,888,000 Euro, Expires 5/03/00, Strike 1.12 2,778 -------------------------- OPTIONS ON FUTURES -- 0.0% USD 942,500 Eurodollar, Expires 3/13/00, Strike 93.75 51,837 -------------------------- TOTAL CALL OPTIONS PURCHASED (COST $334,758) 54,615 -------------------------- PUT OPTIONS PURCHASED -- 0.7% CROSS CURRENCY OPTIONS -- 0.0% EUR 25,100,000 Euro Put/Swiss Franc Call, Expires 6/05/00, Strike 1.58485 36,250 -------------------------- OPTIONS ON CURRENCY -- 0.7% USD 13,268,000 Euro, Expires 5/03/00, Strike 1.07 1,171,564 -------------------------- TOTAL PUT OPTIONS PURCHASED (COST $563,714) 1,207,814 -------------------------- RIGHTS AND WARRANTS -- 0.0% MEXICO -- 0.0% 14,210,000 United Mexican States Warrants, Expires 6/30/03** -- -------------------------- NIGERIA -- 0.0% 1,206 Central Bank of Nigeria Payment Adjusted Warrants, Expires 11/15/20** -- --------------------------
See accompanying notes to the financial statements. 3 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES/ PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ VENEZUELA -- 0.0% 3,570 Republic of Venezuela Recovery Warrants, Expires 4/15/20** -- -------------------------- TOTAL RIGHTS AND WARRANTS (COST $0) -- -------------------------- SHORT-TERM INVESTMENTS -- 0.9% COMMERCIAL PAPER -- 0.8% USD 1,500,000 Koch Industries Inc., 5.83%, due 3/01/00 1,500,000 -------------------------- REPURCHASE AGREEMENT -- 0.1% USD 215,441 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $215,470 and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest, of $219,750. 215,441 -------------------------- TOTAL SHORT-TERM INVESTMENTS (COST $1,715,441) 1,715,441 -------------------------- TOTAL INVESTMENTS -- 101.8% (Cost $186,654,243) 185,974,932 Other Assets and Liabilities (net) -- (1.8%) (3,244,817) -------------------------- TOTAL NET ASSETS -- 100.0% $ 182,730,115 ==========================
See accompanying notes to the financial statements. 4 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000 NOTES TO SCHEDULE OF INVESTMENTS: FLIRB - Front Loaded Interest Reduction Bond Variable and Step up rates - The rates shown on variable and step up rate notes are the current interest rates at February 29, 2000, which are subject to change based on the terms of the security, including varying reset dates. CURRENCY ABBREVIATIONS: AUD - Australian Dollar BEF - Belgian Franc CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro FRF - French Franc GBP - British Pound ITL - Italian Lira JPY - Japanese Yen NZD - New Zealand Dollars SEK - Swedish Krona USD - United States Dollar (a) Valued by management (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). * Non-performing. Borrower not currently paying interest. ** Non-income producing security.
See accompanying notes to the financial statements. 5 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $186,654,243) (Note 1) $ 185,974,932 Cash at interest on deposit at brokers (Note 1) 1,386,122 Receivable for investments sold 28,221 Interest receivable 374,786 Receivable for variation margin on open futures contracts (Notes 1 and 6) 75,337 ----------------- Total assets 187,839,398 ----------------- LIABILITIES: Payable for investments purchased 545,133 Payable to affiliate for (Note 2): Management fee 27,897 Shareholder service fee 21,971 Net payable for open forward foreign currency contracts (Notes 1 and 6) 3,728,029 Interest payable for open swap contracts (Notes 1 and 6) 194,950 Payable for open swap contracts (Notes 1 and 6) 543,782 Accrued expenses and other liabilities 47,521 ----------------- Total liabilities 5,109,283 ----------------- NET ASSETS $ 182,730,115 ================= NET ASSETS CONSIST OF: Paid-in capital $ 197,784,398 Distributions in excess of net investment income (6,013,314) Accumulated net realized loss (4,071,540) Net unrealized depreciation (4,969,429) ----------------- $ 182,730,115 ================= NET ASSETS ATTRIBUTABLE TO: Class III shares $ 182,730,115 ================= SHARES OUTSTANDING: Class III 19,426,265 ================= NET ASSET VALUE PER SHARE: Class III $ 9.41 =================
6 See accompanying notes to the financial statements. GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest (including securities lending income of $3,821) $ 10,776,989 ------------ Total income 10,776,989 ------------ EXPENSES: Management fee (Note 2) 365,979 Interest expense (Note 1) 313,665 Custodian and transfer agent fees 95,176 Audit fees 38,020 Legal fees 3,595 Registration fees 2,889 Trustees fees (Note 2) 2,151 Miscellaneous 2,829 Fees waived or borne by Manager (Note 2) (144,660) ------------ 679,644 Shareholder service fee (Note 2) Class III 288,931 ------------ Net expenses 968,575 ------------ Net investment income 9,808,414 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (4,779,946) Closed futures contracts (3,392,274) Closed swap contracts (1,088,455) Written options 262,500 Foreign currency, forward contracts and foreign currency related transactions (5,579,696) ------------ Net realized loss (14,577,871) ------------ Change in net unrealized appreciation (depreciation) on: Investments 2,079,365 Open futures contracts 821,360 Open swap contracts 184,088 Written options (63,840) Foreign currency, forward contracts and foreign currency related transactions (2,241,806) ------------ Net unrealized gain 779,167 ------------ Net realized and unrealized loss (13,798,704) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (3,990,290) ============
See accompanying notes to the financial statements. 7 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 9,808,414 $ 8,148,695 Net realized gain (loss) (14,577,871) 362,534 Change in net unrealized appreciation (depreciation) 779,167 (6,074,290) ------------ ------------ Net increase (decrease) in net assets from operations (3,990,290) 2,436,939 ------------ ------------ Distributions to shareholders from: Net investment income Class III (4,475,228) (5,497,905) ------------ ------------ Total distributions from net investment income (4,475,228) (5,497,905) ------------ ------------ In excess of net investment income Class III (639,858) (1,386,848) ------------ ------------ Total distributions in excess of net investment income (639,858) (1,386,848) ------------ ------------ Net realized gains Class III -- (793,938) ------------ ------------ Total distributions from net realized gains -- (793,938) ------------ ------------ In excess of net realized gains Class III -- (907,937) ------------ ------------ Total distributions in excess of net realized gains -- (907,937) ------------ ------------ (5,115,086) (8,586,628) ------------ ------------ Net share transactions: (Note 5) Class III 28,624,997 64,308,107 ------------ ------------ Increase in net assets resulting from net share transactions 28,624,997 64,308,107 ------------ ------------ Total increase in net assets 19,519,621 58,158,418 NET ASSETS: Beginning of period 163,210,494 105,052,076 ------------ ------------ End of period (including distributions in excess of net investment income of $6,013,314 and $504,944, respectively) $182,730,115 $163,210,494 ============ ============
8 See accompanying notes to the financial statements. GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, -------------------------------------------------------- 2000 1999 1998 1997 1996* -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.87 $ 10.15 $ 10.16 $ 9.89 $ 10.00 -------- -------- -------- ------- ------- Income from investment operations: Net investment income(a) 0.51 0.55 0.65+ 0.61 0.05 Net realized and unrealized gain (loss) (0.71) (0.25) 0.36 0.59 (0.16) -------- -------- -------- ------- ------- Total from investment operations (0.20) 0.30 1.01 1.20 (0.11) -------- -------- -------- ------- ------- Less distributions to shareholders: From net investment income (0.23) (0.37) (0.56) (0.57) -- In excess of net investment income (0.03) (0.09) -- -- -- From net realized gains -- (0.06) (0.28) (0.36) -- In excess of net realized gains -- (0.06) (0.18) -- -- -------- -------- -------- ------- ------- Total distributions (0.26) (0.58) (1.02) (0.93) -- -------- -------- -------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.41 $ 9.87 $ 10.15 $ 10.16 $ 9.89 ======== ======== ======== ======= ======= TOTAL RETURN(b) (2.07)% 2.69% 10.19% 12.01% (1.10)%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $182,730 $163,210 $105,052 $70,768 $31,072 Net operating expenses to average daily net assets 0.34% 0.34% 0.34% 0.34% 0.34%** Interest expense to average daily net assets 0.16% -- -- -- -- Total net expenses to average daily net assets 0.50%(c) 0.34% 0.34% 0.34% 0.34%** Net investment income to average daily net assets(a) 5.09% 5.86% 6.21% 6.31% 6.16%** Portfolio turnover rate 116% 75% 103% 72% 0% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.03 $ 0.04 $ 0.04 $ 0.01
* Period from December 28, 1995 (commencement of operations) to February 29, 1996. ** Annualized. + Computed using average shares outstanding throughout the period. ++ Not annualized. (a) Net investment income for the year ended February 29, 2000 is affected by the timing of the declaration of dividends by other Funds of the Trust in which the Fund invests. (b) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (c) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
See accompanying notes to the financial statements. 9 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Global Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in global bond and currency markets. The Fund's benchmark is the J.P. Morgan Global Government Bond Index. At February 29, 2000, 85.1% of the Fund is invested in GMO Alpha Libor Fund, a separate fund of GMO Trust managed by GMO. Alpha Libor invests primarily in relatively high quality, low volatility fixed income securities. The financial statements of GMO Alpha Libor Fund should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Shares of other Funds of the Trust are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary 10 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market-makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. At February 29, 2000, the total value of these securities represented 5% of net assets. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FUTURES CONTRACTS The Fund may use futures contracts to manage its exposure to the bond and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is 11 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 29, 2000. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Funds exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 29, 2000 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's 12 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. The risk associated with purchasing put and call options is limited to the premium paid. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the lender) that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. Direct indebtedness of emerging countries involves a risk that the governmental entities responsible for the repayment of the debt may be unable or unwilling to pay the principal and interest when due. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market-linked return, both based on notional 13 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Credit default swaps involve the payment of a specified rate based on the notional amount. The Fund receives payment upon a default of the underlying security. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral, which is paid by the counterparty. At February 29, 2000, $1,386,122 in cash has been set aside. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform and that there may be unfavorable changes in the fluctuation of interest rates. See Note 6 for a summary of open swap agreements as of February 29, 2000. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund was sold may decline below the contractual repurchase price under the agreement. During the year ended February 29, 2000, the Fund had entered into reverse repurchase agreements with an average balance outstanding of 14 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- $9,387,949 and an average interest rate of 5.23%. The maximum balance outstanding was $15,713,000. The average shares outstanding were 19,705,043 and the average balance per share outstanding was $0.48. Average balance outstanding was calculated based on daily balances outstanding during the period the Fund had entered into reverse repurchase agreements. At February 29, 2000, there were no open reverse repurchase agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund had no securities on loan. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to differing treatments for foreign currency transactions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable 15 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $(10,201,698) $10,307,402 $(105,704)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis, and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .15% of the amount invested. The premium will be reduced by 50% with respect to any portion of a purchase that is offset by a corresponding redemption occurring on the same day. In addition, the purchase premium for the Fund will be reduced by 50% if the purchaser makes an in-kind purchase of Fund shares or if the purchase or redemption is part of a transfer from or to another Fund where the Manager is able to transfer securities among the Funds to effect the transaction. All purchase premiums are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $82,781 in purchase premiums. There is no premium for cash redemptions or reinvested distributions. 16 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .19% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .35% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeded .19% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000, was $2,151. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $253,362,632 and $225,169,587, respectively. 17 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- During the year ended February 29, 2000, the Fund exchanged securities with a market value of $160,634,538 for shares of GMO Alpha Libor Fund with a value equal to that market value in taxable transactions. Such amounts are included in purchases and sales above. At February 29, 2000 the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $186,665,850 $3,086,010 $(3,776,928) $(690,918)
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 68.1% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders could have a material effect. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 -------------------------- -------------------------- Shares Amount Shares Amount Class III: ---------- ------------ ---------- ------------ Shares sold 5,558,244 $ 55,187,578 8,321,672 $ 86,437,108 Shares issued to shareholders in reinvestment of distributions 509,734 4,888,345 780,362 8,048,789 Shares repurchased (3,178,026) (31,450,926) (2,915,212) (30,177,790) ---------- ------------ ---------- ------------ Net increase 2,889,952 $ 28,624,997 6,186,822 $ 64,308,107 ========== ============ ========== ============
18 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) --------------------- --------------- ----------------- ----------- -------------- Buys 3/10/00 CAD 33,500,000 $23,093,308 $ 311,941 3/23/00 EUR 74,600,000 71,944,986 (3,642,773) 3/03/00 GBP 14,900,000 23,522,347 (479,271) 5/05/00 GBP 3,600,000 5,682,723 (2,920) 4/21/00 JPY 3,725,000,000 34,216,952 (373,457) ----------- $(4,186,480) =========== Sales 4/28/00 AUD 5,600,000 $ 3,441,777 $ 65,363 3/10/00 CAD 2,700,000 1,861,252 2,556 3/23/00 EUR 1,500,000 1,446,615 22,863 3/03/00 GBP 14,900,000 23,522,347 279,975 4/21/00 JPY 60,000,000 551,145 (520) 3/30/00 NZD 4,500,000 2,185,830 101,880 ----------- $ 472,117 ===========
FORWARD CROSS CURRENCY CONTRACTS
Net Unrealized Settlement Deliver/Units of Appreciation Date Currency Receive/In Exchange For (Depreciation) --------------------- ----------------- ----------------------- -------------- 4/14/00 CHF 27,282,875 EUR 17,000,000 $(11,068) 4/14/00 EUR 3,800,000 CHF 6,095,086 403 4/7/00 SEK 1,715,370 EUR 200,000 (3,001) -------- $(13,666) ========
19 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Expiration Contract Appreciation Contracts Type Date Value (Depreciation) --------------------- ------------------------------ ---------- ----------- -------------- Buys 50 Australian Government Bond 10 March 2000 $ 4,253,121 $ 49,955 Yr. 28 Australian Government Bond 3 March 2000 1,975,366 (10,330) Yr. 41 Canadian Government Bond 10 June 2000 2,782,688 7,565 Yr. 191 Euro Bund 10 Yr. March 2000 19,073,519 (303,622) 2 Japanese Government Bond 10 March 2000 2,406,081 (804) Yr. 109 U.S. Long Bond June 2000 10,320,937 (61,170) 150 U.S. Treasury Note 5 Yr. June 2000 14,564,063 110,998 --------- $(207,408) ========= Sales 2 Japanese Government Bond 10 March 2000 $ 2,405,353 $ 6,404 Yr. 5 Japanese Government Bond 10 June 2000 5,954,212 720 Yr. 106 Swiss Government Bond 10 Yr. March 2000 7,516,063 138,019 37 U.K. Gilt June 2000 6,524,052 37,742 163 U.S. Treasury Note 10 Yr. June 2000 15,548,672 32,050 --------- $ 214,935 =========
At February 29, 2000, the Fund has cash and/or securities to cover any margin requirements on open futures contracts. 20 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- WRITTEN OPTION TRANSACTIONS
Puts Calls Principal Amount Principal Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ---------------- --------- ---------------- --------- Outstanding, beginning of period 3,500 $220,290 3,500 $262,500 Options written -- -- -- -- Options closed -- -- -- -- Options exercised (3,500) (220,290) -- -- Options expired -- -- (3,500) (262,500) Options sold -- -- -- -- ------ -------- ------ -------- Outstanding, end of period -- $ -- -- $ -- ====== ======== ====== ========
SWAP AGREEMENTS
Net Unrealized Expiration Appreciation Notional Amount Date Description (Depreciation) --------------------- ---------- ------------------------------------ -------------- CREDIT DEFAULT SWAPS 108,000,000,000 ITL 3/31/03 Agreement with Morgan Guaranty Trust $ (58,976) Company dated 3/26/98 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Italy, the notional amount times the difference between the par value and the then-market value of Italy BTP, 6.00% due 11/01/07. 2,263,500,000 BEF 3/31/03 Agreement with Morgan Guaranty Trust (69,802) Company dated 3/26/98 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Belgium, the notional amount times the difference between the par value and the then-market value of Kingdom of Belgium, 5.75% due 3/28/08.
21 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Expiration Net Unrealized Notional Amount Date Description Appreciation --------------------- ---------- ------------------------------------ -------------- INTEREST RATE SWAPS 7,100,000 CHF 6/05/05 Agreement with Morgan Guaranty Trust $ 109,829 Company dated 6/03/98 to pay the notional amount multiplied by 3.245% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 7,400,000 CHF 6/10/05 Agreement with Credit Suisse 112,909 Financial Products dated 6/08/98 to pay the notional amount multiplied by 3.2625% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 2,300,000 CHF 6/10/05 Agreement with Credit Suisse 64,623 Financial Products dated 10/01/98 to pay the notional amount multiplied by 3.2625% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 3,900,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust 61,596 Company dated 6/09/98 to pay the notional amount multiplied by 3.245% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 6,800,000 CHF 9/16/05 Agreement with Morgan Guaranty Trust 170,159 Company dated 9/14/98 to pay the notional amount multiplied by 3.1175% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread.
22 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Expiration Appreciation Notional Amount Date Description (Depreciation) --------------------- ---------- ------------------------------------ -------------- 22,000,000 USD 7/29/06 Agreement with Morgan Guaranty Trust $(780,232) Company dated 7/27/99 to receive the notional amount multiplied by 6.664% and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. 30,000,000 SEK 9/13/06 Agreement with UBS AG dated 9/09/99 13,899 to receive the notional amount multiplied by 6.465% and to pay the notional amount multiplied by 3 month Floating Rate Swedish LIBOR adjusted by a specified spread. TOTAL RETURN SWAPS 30,000,000 USD 7/25/01 Agreement with Morgan Guaranty Trust (26,841) Company dated 7/01/99 to receive (pay) the notional amount multiplied by the return on the JP Morgan Non-U.S. Traded Total Return Government Bond Index and to pay the notional amount multiplied by 1 month LIBOR adjusted by a specified spread.+ 75,000,000 USD 9/27/01 Agreement with Morgan Guaranty Trust (140,946) Company dated 9/22/99 to receive (pay) the notional amount multiplied by the return on the JP Morgan Traded Total Return Government Bond Index and to pay the notional amount multiplied by 1 month LIBOR adjusted by a specified spread.+ --------- $(543,782) =========
+ This swap agreement is valued by management (Note 1). See Notes to the Schedule of Investments for definitions of currency abbreviations.
23 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- The Fund has elected to defer to March 1, 2000 post October capital losses of $3,974,684 and foreign currency losses of $9,832,019. 24 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the Global Bond Fund returned -2.1% for the fiscal year ended February 29, 2000, compared to -3.4% for the J.P. Morgan Global Government Bond Index. Consistent with the Fund's investment objectives and policies, the Fund was substantially invested in investment-grade, foreign and domestic fixed income instruments throughout the period. The Fund outperformed the benchmark during the fiscal year by 1.3%. Currency and emerging country debt selection added value during the fiscal year, while bond market and issue selection were negative and reduced portfolio return. Long bond yields increased by 20 to 200 basis points in developed countries, except in Japan where yields declined by 60 basis points. Other than in Japan, bond market returns were negative across the international bond universe. The U.S. dollar appreciated against European currencies, but declined against the Japanese yen, Canadian dollar and Australian dollar. Bond market selection during the fiscal year was hurt by an underweight position in Japanese bonds and an overweight position in Swedish bonds. These losses were offset to some extent by an underweight position in Swiss bonds. Currency selection added modest value during the fiscal year. Overweight positions in Canadian dollars and British pounds added more than 150 basis points in value, but were offset to some extent by losses on underweight positions in U.S. and Australian dollars and an overweight position in Euros. Emerging country debt exposure added nearly 200 basis points during the fiscal year, with much of it concentrated in the second half of the period. Sovereign spreads on the J.P. Morgan Emerging Markets Bond Index Plus declined from 1330 basis points to end the fiscal year at 816 basis points. Issue selection was neutral during the fiscal year despite rising short-term interest rates and concerns about Y2K. OUTLOOK The Fund is structured to benefit from outperformance in the Australian, Canadian, European, New Zealand, Swedish, U.S. and emerging bond markets. We expect the Danish, Japanese, Swiss and British bond markets to underperform. Our strategy maintains a market duration in each country. Strong relative performance is expected from Canadian dollars, Euros and Swiss francs. The Australian dollar, Danish krone, Japanese yen, Swedish krona, British pound and U.S. dollar are expected to underperform. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO GLOBAL BOND FUND CLASS III SHARES AND THE J.P. MORGAN GLOBAL GOVERNMENT BOND INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 12/28/95 1yr 5yr 10yr (ITD) - -2.21 N/A 5
[GRAPH]
Date GMO Global Bond Fund-III JP Morgan Global Gov't Bond 12/28/95 9985 10000 12/31/95 9985 10002 3/31/96 9815 9826 6/30/96 10255 9886 9/30/96 10750 10165 12/31/96 11290 10442 3/31/97 10920 10033 6/30/97 11334 10328 9/30/97 11869 10506 12/31/97 12009 10588 3/31/98 12201 10693 6/30/98 12321 10934 9/30/98 12959 11855 12/31/98 13240 12210 3/31/99 12580 11734 6/30/99 12175 11331 9/30/99 12568 11777 12/31/99 12506 11589 2/29/00 12258 11304
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 15 bp on the purchase. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO International Bond Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 18, 2000 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 93.7% ARGENTINA -- 0.9% USD 500,000 Republic of Argentina, 12.13%, due 02/25/19 520,500 USD 1,000,000 Republic of Argentina Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 6.88%, due 03/31/23 825,000 ----------- 1,345,500 ----------- AUSTRALIA -- 2.8% AUD 2,620,000 Queensland Treasury Corp, 8.00%, due 09/14/07 1,705,756 USD 2,500,000 Westralia Airports Corp, 144A, 6.48%, due 04/01/10 2,266,250 ----------- 3,972,006 ----------- BRAZIL -- 1.6% USD 3,000,000 Brazil Discount ZL Bond, Variable Rate, 6 mo. LIBOR + .81%, 6.94%, due 04/15/24 2,343,750 ----------- BULGARIA -- 2.5% USD 1,000,000 Bulgaria Discount Bond Series B, Variable Rate, 6 mo. LIBOR + 1.31%, 7.56%, due 07/28/24 823,750 USD 5,000,000 Bulgaria Discount Series B Interest Strips, Basket 2, 0.00%, due 07/28/24 895,000 USD 10,000,000 Bulgaria Discount Strips, 0.00%, due 07/28/24(a) 1,965,225 ----------- 3,683,975 ----------- CANADA -- 10.3% CAD 750,000 Government of Canada, 10.25%, due 03/15/14 715,524 CAD 5,000,000 Government of Canada Real Return, 4.25%, due 12/01/21 4,060,579 CAD 3,000,000 Government of Canada Real Return, 4.25%, due 12/01/26 2,321,599 CAD 2,000,000 Province of British Columbia, 7.88%, due 11/30/23 1,586,492 GBP 3,500,000 Province of Quebec, 8.62%, due 11/04/11 6,255,362 ----------- 14,939,556 ----------- CAYMAN ISLANDS -- 8.4% GBP 2,000,000 BA Credit Card Corp Series 97-1, 7.13%, due 09/15/02 3,143,507 GBP 2,000,000 Chester Asset Receivables, Inc., Deal 2, Variable Rate, 3 mo. GBP LIBOR + .10%, 6.11%, due 06/15/01 3,157,084 CAD 2,000,000 Government of Canada (Cayman), 7.25%, due 06/01/08 1,433,494
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- CAYMAN ISLANDS -- CONTINUED USD 5,000,000 Pemex Finance Ltd. Series 1A1 Class A2, 144A, 6.30%, due 05/15/10 4,460,000 ----------- 12,194,085 ----------- CHILE -- 2.2% USD 3,500,000 Banco Santander, Series MBIA, 6.50%, due 11/01/05 3,267,250 ----------- FRANCE -- 1.5% FRF 14,000,000 Auxiliare Credit Foncier, 10.00%, due 04/20/01 2,181,061 ----------- GERMANY -- 2.2% GBP 3,000,000 Schweiz Bankgesellschaft, Zero Coupon, due 03/31/06 3,124,879 ----------- JAPAN -- 7.7% GBP 2,000,000 Export Import Bank of Japan, 10.75%, due 05/15/01 3,291,590 USD 1,030,000 Japan Highway Public Corporation, 7.63%, due 09/22/04 1,031,545 GBP 4,000,000 Kobe City, 9.50%, due 10/20/04 6,917,863 ----------- 11,240,998 ----------- JORDAN -- 0.5% USD 1,000,000 Hashemite Kingdom of Jordan Par Bond Series DEF, Variable Rate, Step Up, 144A, 6.00%, due 12/23/23 667,500 ----------- MEXICO -- 3.8% FRF 15,000,000 Mexico Par Bond, 6.63%, due 12/31/19 1,945,725 CHF 9,000,000 Mexico Par Bond, 3.75%, due 12/31/19 3,634,470 ----------- 5,580,195 ----------- NEW ZEALAND -- 2.2% NZD 6,800,000 New Zealand Index Linked Bond Series 216, 4.50%, due 02/15/16 3,192,121 ----------- NIGERIA -- 0.4% USD 1,228,385 Central Bank of Nigeria Par Bond Odd Lot, Variable Rate, Step Up, 6.25%, due 11/15/20(a) 635,689 ----------- NORWAY -- 0.5% SEK 6,300,000 A/S Eksportfinans, 7.50%, due 08/16/01 737,503 -----------
See accompanying notes to the financial statements. 2 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- SUPRA NATIONAL -- 3.6% AUD 14,000,000 European Bank for Reconstruction and Development, Zero Coupon, due 02/10/28 1,093,767 CAD 700,000 European Investment Bank, 8.50%, due 08/30/05 523,191 GBP 2,000,000 International Bank for Reconstruction and Development, 11.50%, due 11/09/03 3,631,010 ----------- 5,247,968 ----------- SWEDEN -- 3.0% SEK 20,000,000 Government of Sweden Index Linked Bond, 4.00%, due 12/01/20 2,306,832 SEK 17,200,000 Kingdom of Sweden, 6.00%, due 02/09/05 1,986,034 ----------- 4,292,866 ----------- UNITED STATES -- 39.1% ASSET BACKED SECURITIES -- 29.7% USD 5,000,000 Aircraft Finance Trust Series 99-1A Class A1, Variable Rate, 1 mo. LIBOR + .48%, 6.36%, due 05/15/24 4,990,625 USD 5,000,000 Augusta Funding Ltd. X, 144A, Variable Rate, 3mo. LIBOR + .25%, 6.43%, due 06/30/17 4,846,094 USD 5,000,000 Big Flower Receivables Master Trust Series 96-2 Class A, Variable Rate, LIBOR + .25%, 6.13%, due 04/25/03 4,925,000 USD 3,500,000 Discover Card Master Trust I Series 99-3 Class A, Variable Rate, 1 mo. LIBOR + .11%, 5.99%, due 09/15/04 3,498,906 USD 4,492,655 Northstar CBO Ltd. Series 97-2 Class A2, 144A, Variable Rate, Step Up, 6.62%, due 07/15/09 4,169,043 USD 5,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A, Variable Rate, Step Up, 6.33%, due 09/15/09 4,921,875 USD 5,966,000 SMS Student Loan Trust Series 94-A Certificates, Variable Rate, 1 mo. LIBOR + .70%, 6.51%, due 07/26/21 5,969,580 USD 5,000,000 Society Student Loan Trust Series 93-A Class B, Variable Rate, 1 mo. LIBOR + .75%, 6.56%, due 07/25/03 5,000,000 USD 5,000,000 Starvest Emerging Markets CBO-I Series 1A, Class A, Variable Rate, 6 mo. LIBOR + .19%, 144A, 6.41%, due 07/30/11 4,869,531 ----------- 43,190,654 ----------- CORPORATE DEBT -- 1.1% SEK 14,000,000 Toyota Motor Credit, 7.50%, due 08/06/01 1,639,535 -----------
See accompanying notes to the financial statements. 3 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY -- 8.3% USD 2,401,188 Agency for International Development Floater (Support of Honduras), Variable Rate, 3 mo. U.S. Treasury Bill x 117%, 5.93%, due 10/01/11 2,317,146 USD 1,000,000 Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10%, 6.15%, due 02/01/27 980,000 USD 1,681,201 Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. U.S. Treasury Bill + .45%, 6.47%, due 11/15/14 1,634,968 USD 825,165 Agency for International Development Floater (Support of Peru), Series A, Variable Rate, 6 mo. U.S. Treasury Bill + .35%, 5.99%, due 05/01/14 792,159 USD 2,342,054 Agency for International Development Floater (Support of Peru), Series A, Variable Rate, 6 mo. U.S. Treasury Bill +.35%, 6.18%, due 05/01/14 2,248,371 USD 133,333 Agency for International Development Floater (Support of Peru), Variable Rate, 3 mo. U.S. Treasury Bill x 114%, 6.18%, due 02/01/02 132,667 USD 4,000,000 Federal Home Loan Bank, Variable Rate, CPI + 3.15%, 5.66%, due 02/15/02(b) 3,892,360 ----------- 11,997,671 ----------- TOTAL UNITED STATES 56,827,860 ----------- VENEZUELA -- 0.5% USD 1,000,000 Republic of Venezuela Discount Bond Series W-B, Variable Rate, 6 mo. LIBOR + .81%, 6.88%, due 03/31/20 772,500 ----------- TOTAL DEBT OBLIGATIONS (COST $144,102,898) 136,247,262 ----------- LOAN ASSIGNMENTS -- 1.6% RUSSIA -- 1.6% USD 9,646,950 Russia Vnesh Restructured Loan Agreements* 2,279,092 ----------- TOTAL LOAN ASSIGNMENTS (COST $4,624,582) 2,279,092 -----------
See accompanying notes to the financial statements. 4 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- MUTUAL FUND -- 3.1% 178,260 GMO Alpha Libor Fund 4,508,186 ----------- TOTAL MUTUAL FUND (COST $4,499,740) 4,508,186 ----------- PRINCIPAL AMOUNT ------------- CALL OPTIONS PURCHASED -- 0.0% OPTIONS ON CURRENCY -- 0.0% USD 12,880,000 Euro, Expires 5/03/00, Strike 1.12 2,576 ----------- OPTIONS ON FUTURES -- 0.0% USD 910,000 Eurodollar, Expires 3/13/00, Strike 93.75 50,050 ----------- TOTAL CALL OPTIONS PURCHASED (COST $311,528) 52,626 ----------- PUT OPTIONS PURCHASED -- 0.8% CROSS CURRENCY OPTIONS -- 0.0% EUR 21,800,000 Euro Put/Swiss Franc Call, Expires 6/05/00, Strike 1.58485 31,484 ----------- OPTIONS ON CURRENCY -- 0.8% USD 12,305,000 Euro, Expires 5/03/00, Strike 1.07 1,086,531 ----------- TOTAL PUT OPTIONS PURCHASED (COST $509,995) 1,118,015 ----------- SHARES ------------- RIGHTS AND WARRANTS -- 0.0% MEXICO -- 0.0% 8,613,000 United Mexican States Warrants, Expires 6/30/03** -- ----------- NIGERIA -- 0.0% 1,227 Central Bank of Nigeria Payment Adjusted Warrants, Expires 11/15/20** -- -----------
See accompanying notes to the financial statements. 5 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES/ PAR VALUE DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- VENEZUELA -- 0.0% 7,140 Republic of Venezuela Recovery Warrants, Expires 4/15/20** -- ----------- TOTAL RIGHTS AND WARRANTS (COST $0) -- ----------- SHORT-TERM INVESTMENTS -- 1.5% COMMERCIAL PAPER -- 1.4% USD 2,000,000 Koch Industries Inc., 5.83%, due 3/01/00 2,000,000 ----------- REPURCHASE AGREEMENT -- 0.1% USD 116,115 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $116,131 and an effective yield of 4.95%, collateralized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest, of $118,437. 116,115 ----------- TOTAL SHORT-TERM INVESTMENTS (COST $2,116,115) 2,116,115 ----------- TOTAL INVESTMENTS -- 100.7% (Cost $156,164,858) 146,321,296 Other Assets and Liabilities (net) -- (0.7%) (948,108) ----------- TOTAL NET ASSETS -- 100.0% $145,373,188 ===========
See accompanying notes to the financial statements. 6 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000 NOTES TO SCHEDULE OF INVESTMENTS: CPI - Consumer Price Index 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. Variable and Step up rates - The rates shown on variable and step up rate notes are the current interest rates at February 29, 2000, which are subject to change based on the terms of the security, including varying reset dates. CURRENCY ABBREVIATIONS: AUD - Australian Dollar BEF - Belgian Franc CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro FRF - French Franc GBP - British Pound ITL - Italian Lira JPY - Japanese Yen NZD - New Zealand Dollars SEK - Swedish Krona USD - United States Dollar (a) Valued by management (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). * Non-performing. Borrower not currently paying interest. ** Non-income producing security. See accompanying notes to the financial statements. 7 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $156,164,858) (Note 1) $146,321,296 Cash at interest on deposit at brokers (Note 1) 1,841,096 Receivable for investments sold 28,221 Interest receivable 2,350,200 Receivable for expenses waived or borne by Manager (Note 2) 6,735 ------------ Total assets 150,547,548 ------------ LIABILITIES: Payable for investments purchased 545,133 Payable to affiliate for (Note 2): Management fee 29,162 Shareholder service fee 17,402 Net payable for open forward foreign currency contracts (Notes 1 and 6) 3,838,565 Interest payable for open swap contracts (Note 1) 446,184 Payable for open swap contracts (Notes 1 and 6) 228,263 Payable for variation margin on open futures contracts (Notes 1 and 6) 9,259 Accrued expenses 60,392 ------------ Total liabilities 5,174,360 ------------ NET ASSETS $145,373,188 ============ NET ASSETS CONSIST OF: Paid-in capital $161,827,531 Distributions in excess of net investment income (2,483,990) Accumulated net realized gain 469,227 Net unrealized depreciation (14,439,580) ------------ $145,373,188 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $145,373,188 ============ SHARES OUTSTANDING: Class III 15,816,518 ============ NET ASSET VALUE PER SHARE: Class III $ 9.19 ============
8 See accompanying notes to the financial statements. GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest (including securities lending income of $2,177) $11,423,732 Dividends 165,875 ----------- Total income 11,589,607 ----------- EXPENSES: Management fee (Note 2) 417,278 Custodian and transfer agent fees 99,271 Audit fees 55,901 Interest expense (Note 1) 53,732 Legal fees 2,976 Registration fees 2,471 Trustees fees (Note 2) 1,872 Miscellaneous 2,924 Fees waived or borne by Manager (Note 2) (165,415) ----------- 471,010 Shareholder service fee (Note 2) Class III 250,367 ----------- Net expenses 721,377 ----------- Net investment income 10,868,230 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (2,785,697) Closed futures contracts (280,291) Closed swap contracts (695,971) Written options 472,500 Foreign currency, forward contracts and foreign currency related transactions (7,439,304) ----------- Net realized loss (10,728,763) ----------- Change in net unrealized appreciation (depreciation) on: Investments (3,912,442) Open futures contracts 80,175 Open swap contracts 1,129,271 Written options (114,912) Foreign currency, forward contracts and foreign currency related transactions (1,818,403) ----------- Net unrealized loss (4,636,311) ----------- Net realized and unrealized loss (15,365,074) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(4,496,844) ===========
See accompanying notes to the financial statements. 9 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 10,868,230 $ 17,115,565 Net realized gain (loss) (10,728,763) 11,107,758 Change in net unrealized appreciation (depreciation) (4,636,311) (16,558,967) ------------ ------------- Net increase (decrease) in net assets from operations (4,496,844) 11,664,356 ------------ ------------- Distributions to shareholders from: Net investment income Class III (6,522,666) (8,308,647) ------------ ------------- Total distributions from net investment income (6,522,666) (8,308,647) ------------ ------------- In excess of net investment income Class III -- (1,994,554) ------------ ------------- Total distributions in excess of net investment income -- (1,994,554) ------------ ------------- Net realized gains Class III (3,231,690) (5,508,618) ------------ ------------- Total distributions from net realized gains (3,231,690) (5,508,618) ------------ ------------- (9,754,356) (15,811,819) ------------ ------------- Net share transactions: (Note 5) Class III (22,204,508) (107,045,783) ------------ ------------- Decrease in net assets resulting from net share transactions (22,204,508) (107,045,783) ------------ ------------- Total decrease in net assets (36,455,708) (111,193,246) NET ASSETS: Beginning of period 181,828,896 293,022,142 ------------ ------------- End of period (including distributions in excess of net investment income of $2,483,990 and accumulated undistributed net investment income of $4,362,615, respectively) $145,373,188 $ 181,828,896 ============ =============
10 See accompanying notes to the financial statements. GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.06 $ 10.45 $ 10.78 $ 10.92 $ 9.64 -------- -------- -------- -------- -------- Income from investment operations: Net investment income(a) 0.70 0.71 0.59 0.71 0.62 Net realized and unrealized gain (loss) (0.99) (0.42) 0.08 0.65 1.55 -------- -------- -------- -------- -------- Total from investment operations (0.29) 0.29 0.67 1.36 2.17 -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.39) (0.36) (0.54) (0.81) (0.59) In excess of net investment income -- (0.09) -- -- -- From net realized gains (0.19) (0.23) (0.10) (0.54) (0.30) In excess of net realized gains -- -- (0.36) (0.15) -- -------- -------- -------- -------- -------- Total distributions (0.58) (0.68) (1.00) (1.50) (0.89) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.19 $ 10.06 $ 10.45 $ 10.78 $ 10.92 ======== ======== ======== ======== ======== TOTAL RETURN(b) (2.98)% 2.48% 6.32% 12.39% 22.72% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $145,373 $181,829 $293,022 $235,783 $193,920 Net operating expenses to average daily net assets 0.40% 0.40% 0.40% 0.40% 0.40% Interest expense to average daily net assets 0.03% -- -- -- -- Total net expenses to average daily net assets 0.43%(c) 0.40% 0.40% 0.40% 0.40% Net investment income to average daily net assets(a) 6.51% 6.45% 6.24% 6.93% 8.17% Portfolio turnover rate 39% 106% 105% 95% 99% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.03 $ 0.02 $ 0.02 $ 0.01
(a) Net investment income is affected by the timing of the declaration of dividends by other Funds of the Trust in which the Fund invests. (b) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (c) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. See accompanying notes to the financial statements. 11 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO International Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager"or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in foreign bond and currency markets. The Fund's benchmark is the J.P. Morgan Non-U.S. Government Bond Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Shares of other Funds of the Trust are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). 12 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Securities may be valued by independent pricing services which use prices provided by market-makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. At February 29, 2000, the total value of these securities represented 23% of net assets. Included in this total are U.S. Government backed securities and other highly rated collateralized debt obligations that represent 19% of net assets at February 29, 2000. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FUTURES CONTRACTS The Fund may use futures contracts to manage its exposure to the bond and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract 13 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 29, 2000. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 29, 2000 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's 14 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. The risk associated with purchasing put and call options is limited to the premium paid. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the lender) that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. Direct indebtedness of emerging countries involves a risk that the governmental entities responsible for the repayment of the debt may be unable or unwilling to pay the principal and interest when due. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market linked return, both based on notional 15 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Credit default swaps involve the payment of a specified rate based on the notional amount. The Fund receives payment upon a default of the underlying security. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral, which is paid by the counterparty. At February 29, 2000, $1,841,096 in cash has been set aside. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform and that there may be unfavorable changes in the fluctuation of interest rates. See Note 6 for a summary of open swap agreements as of February 29, 2000. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund has sold may decline below the contractual repurchase price under the agreement. During the year ended February 29, 2000, the 16 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Fund had entered into reverse repurchase agreements with an average balance outstanding of $3,527,724 and an average interest rate of 5.23%. The maximum balance outstanding was $6,299,000. The average shares outstanding were 17,640,282 and the average balance per share outstanding was $0.20. Average balance outstanding was calculated based on daily balances outstanding during the period the Fund had entered into reverse repurchase agreements. At February 29, 2000, there were no open reverse repurchase agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000 the Fund had no securities on loan. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to differing treatments for foreign currency transactions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable 17 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $(11,192,169) $11,171,959 $20,210
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis, and is adjusted for the accretion of discounts. Dividend income is recorded on the ex-dividend date. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of these securities is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .15% of the amount invested. The premium will be reduced by 50% with respect to any portion of a purchase that is offset by a corresponding redemption occurring on the same day. In addition, the purchase premium for the Fund will be reduced by 50% if the purchaser makes an in-kind purchase of Fund shares or if the purchase or redemption is part of a transfer from or to another Fund where the Manager is able to transfer securities among the Funds to effect the transaction. All purchase premiums are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $7,451 in purchase premiums. There is no premium for cash redemptions or reinvested distributions. 18 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .40% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeded .25% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000, was $1,872. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $63,294,081 and $98,034,683, respectively. 19 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- At February 29, 2000, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $156,266,898 $2,265,628 $(12,211,230) $(9,945,602)
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 56.1% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders could have a material effect. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ------------------------ -------------------------- Shares Amount Shares Amount Class III: ---------- ------------ ----------- ------------- Shares sold 506,647 $ 5,058,435 5,484,951 $ 57,695,554 Shares issued to shareholders in reinvestment of distributions 824,412 7,759,488 1,255,142 13,253,099 Shares repurchased (3,580,058) (35,022,431) (16,723,091) (177,994,436) ---------- ------------ ----------- ------------- Net decrease (2,248,999) $(22,204,508) (9,982,998) $(107,045,783) ========== ============ =========== =============
20 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ---------- --------------- ------------------- ---------------- -------------- Buys 3/10/00 CAD 17,700,000 $12,201,539 $ 164,817 3/23/00 EUR 78,500,000 75,706,185 (3,843,304) 3/03/00 GBP 19,200,000 30,310,675 (305,961) 4/21/00 JPY 4,660,000,000 42,805,637 (469,256) ----------- $(4,453,704) =========== Sales 4/28/00 AUD 7,800,000 $ 4,793,903 $ 91,042 3/10/00 CAD 4,200,000 2,895,280 7,544 3/23/00 EUR 600,000 578,646 8,694 3/03/00 GBP 19,200,000 30,310,675 428,029 5/05/00 GBP 12,800,000 20,205,236 10,380 4/21/00 JPY 110,000,000 1,010,434 (954) 3/30/00 NZD 6,800,000 3,303,032 153,952 ----------- $ 698,687 ===========
FORWARD CROSS CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Units of Currency Receive/In Exchange For (Depreciation) ---------- ------------------------- ----------------------- -------------- 4/14/00 CHF 18,135,088 EUR 11,300,000 $ (7,357) 4/14/00 EUR 3,100,000 CHF 4,972,307 329 4/07/00 SEK 43,741,935 EUR 5,100,000 (76,520) -------- $(83,548) ========
21 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) -------------------------- --------------------------------------------- --------------- ------------ -------------- Buys 30 Australian Government Bond 3 Yr. March 2000 $ 2,116,463 $ (11,068) 345 Euro Bund 10 Yr. March 2000 34,452,168 (495,556) 17 Japanese Government Bond 10 Yr. March 2000 20,445,496 53,251 13 Japanese Government Bond 10 Yr. June 2000 15,480,952 (2,464) 81 Swiss Government Bond 10 Yr. March 2000 5,743,407 (104,225) --------- $(560,062) ========= Sales 3 Australian Government Bond 3 Yr. March 2000 $ 255,187 $ 309 49 Canadian Government Bond 10 Yr. June 2000 3,325,651 (10,120) 17 Japanese Government Bond 10 Yr. March 2000 20,451,686 6,063 78 U.K. Gilt June 2000 13,753,406 77,365 68 U.S. Treasury Bond June 2000 6,438,750 37,277 226 U.S. Treasury Note 10 Yr. June 2000 21,558,281 44,438 --------- $ 155,332 =========
At February 29, 2000, the Fund has sufficient cash and/or securities to cover any margin requirements on open futures contracts. 22 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- WRITTEN OPTION TRANSACTIONS
Puts Calls Principal Amount Principal Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ---------------- ------------- ---------------- ------------- Outstanding, beginning of period 6,300 $ 396,522 6,300 $ 472,500 Options written -- -- -- -- Options closed -- -- -- -- Options exercised (6,300) (396,522) -- -- Options expired -- -- (6,300) (472,500) ----------- --------- ----------- --------- Outstanding, end of period -- $ -- -- $ -- =========== ========= =========== =========
SWAP AGREEMENTS
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ----------------------- ---------- -------------------------------------------------- -------------- CREDIT DEFAULT SWAPS 270,000,000,000 ITL 3/31/03 Agreement with Morgan Guaranty Trust Company dated $(147,441) 3/26/98 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Italy, the notional amount times the difference between the par value and the then- market value of Italy BTP, 6.00% due 11/01/07. 5,658,750,000 BEF 3/31/03 Agreement with Morgan Guaranty Trust Company dated (174,506) 3/26/98 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Belgium, the notional amount times the difference between the par value and the then-market value of Kingdom of Belgium, 5.75% due 3/28/08.
23 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ----------------------- ---------- -------------------------------------------------- -------------- INTEREST RATE SWAPS 16,800,000 CHF 6/05/05 Agreement with Morgan Guaranty Trust Company dated $ 260,920 6/03/98 to pay the notional amount multiplied by 3.245% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 14,500,000 CHF 6/10/05 Agreement with Credit Suisse Financial Products 221,240 dated 6/08/98 to pay the notional amount multiplied by 3.2625% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 10,000,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust Company dated 157,936 6/09/98 to pay the notional amount multiplied by 3.245% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 4,400,000 CHF 9/16/05 Agreement with Morgan Guaranty Trust Company dated 190,642 9/14/98 to pay the notional amount multiplied by 3.1175% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread.
24 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ----------------------- ---------- -------------------------------------------------- -------------- 20,000,000 USD 7/29/06 Agreement with Morgan Guaranty Trust Company dated $(709,301) 7/27/99 to receive the notional amount multiplied by 6.664% and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. 27,000,000 SEK 9/13/06 Agreement with UBS AG dated 9/09/99 to receive the 12,509 notional amount multiplied by 6.465% and to pay the notional amount multiplied by 3 month Floating Rate Swedish LIBOR adjusted by a specified spread. TOTAL RETURN SWAP 45,000,000 USD 7/25/01 Agreement with Morgan Guaranty Trust Company dated (40,262) 7/01/99 to receive (pay) the notional amount multiplied by the return on the JP Morgan Non-U.S. Traded Total Return Government Bond Index and to pay the notional amount multiplied by 1 month LIBOR adjusted by a specified spread.+ --------- $(228,263) =========
+ This swap agreement is valued by management (Note 1). See Notes to the Schedule of Investments for definitions of currency abbreviations. 25 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- The Fund has elected to defer to March 1, 2000 post October foreign currency losses of $6,027,432. For the fiscal year ended February 29, 2000, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 33.1% of distributions as net capital gain dividends. 26 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the International Bond Fund returned -3.0% for the fiscal year ended February 29, 2000, compared to -5.4% for the J.P. Morgan Non-U.S. Government Bond Index. Consistent with the Fund's investment objectives and policies, the Fund was substantially invested in investment-grade, foreign and domestic fixed income instruments throughout the period. The Fund outperformed the benchmark during the fiscal year by 2.4%. Currency and emerging country debt selection added value during the fiscal year, while bond market and issue selection were negative and reduced portfolio return. Long bond yields increased by 20 to 200 basis points in developed countries, except in Japan where yields declined by 60 basis points. Other than in Japan, bond market returns were negative across the international bond universe. The U.S. dollar appreciated against European currencies, but declined against the Japanese yen, Canadian dollar and Australian dollar. Bond market selection during the fiscal year was hurt by an underweight position in Japanese bonds and an overweight position in Swedish bonds. These losses were offset to some extent by an underweight position in Swiss bonds. Currency selection added modest value during the fiscal year. Overweight positions in Canadian dollars and British pounds added more than 150 basis points in value, but were offset to some extent by losses on underweight positions in U.S. and Australian dollars and an overweight position in Euros. Emerging country debt exposure added more than 250 basis points during the fiscal year, with much of it concentrated in the second half of the period. Sovereign spreads on the J.P. Morgan Emerging Markets Bond Index Plus declined from 1330 basis points to end the fiscal year at 816 basis points. Issue selection was neutral during the fiscal year despite rising short-term interest rates and concerns about Y2K. OUTLOOK The Fund is structured to benefit from outperformance in the Australian, Canadian, European, New Zealand, Swedish, U.S. and emerging bond markets. We expect the Danish, Japanese, Swiss and British bond markets to underperform. Our strategy maintains a market duration in each country. Strong relative performance is expected from Canadian dollars, Euros and Swiss francs. The Australian dollar, Danish krone, Japanese yen, Swedish krona, British pound and U.S. dollar are expected to underperform. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO INTERNATIONAL BOND FUND CLASS III SHARES AND THE J.P. MORGAN NON-U.S. GOVERNMENT BOND INDEX AS OF FEBRUARY 29, 2000
Average Annual Total Returns Inception 12/22/93 1yr 5yr 10yr (ITD) - -3.13 7.79 7.55 [GRAPH] Date GMO International Bond Fund-III JP Morgan Non-US Gov't Bond 12/22/93 9985 10000 12/31/93 9885 9900 3/31/94 9945 10017 6/30/94 10065 10147 9/30/94 10560 10320 12/31/94 10395 10386 3/31/95 11490 11846 6/30/95 12428 12393 9/30/95 12579 12240 12/31/95 13235 12579 3/31/96 13247 12368 6/30/96 13876 12453 9/30/96 14653 12893 12/31/96 15441 13242 3/31/97 14655 12472 6/30/97 15137 12791 9/30/97 15687 12864 12/31/97 15575 12742 3/31/98 15726 12826 6/30/98 15787 13081 9/30/98 16675 14384 12/31/98 17256 15072 3/31/99 16259 14325 6/30/99 15599 13665 9/30/99 16319 14424 12/31/99 16311 14142 2/29/00 15696 13523
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 15 bp on the purchase. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Emerging Country Debt Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 18, 2000 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 74.3% ARGENTINA -- 11.6% ARS 4,400,000 Provincia Corrientes Series 1, PIK, Variable Rate, 1 mo. Peso Deposit Rate, 2.87%, due 04/01/09 2,134,213 ARS 2,500,000 Provincia Corrientes Series 2, PIK, Variable Rate, 1 mo. Peso Deposit Rate, 2.87%, due 04/01/09 1,212,621 USD 50,250,000 Republic of Argentina, 12.13%, due 02/25/19 52,310,250 ARS 17,823,800 Republic of Argentina Bocon Pro 1, PIK, Variable Rate, 1 mo. Peso Deposit Rate, 2.87%, due 04/01/07(a) 12,014,443 ARS 4,000,000 Republic of Argentina Bocon Pro 1, PIK, Variable Rate, 1 mo. Peso Deposit Rate , 2.87%, due 04/01/07 2,860,286 DEM 3,830,000 Republic of Argentina Discount Bond, Variable Rate, 6 mo. DEM LIBOR + .81%, 4.31%, due 03/31/23 1,319,781 ARS 27,436,201 Republic of Argentina INDER Certificates, 6.00%, due 04/15/06 15,365,809 ARS 35,134,370 Republic of Argentina Pro 1 Co-Participation Rights, Variable Rate, 1 mo. Peso Deposit Rate, 2.87%, due 04/01/07 17,561,915 USD 2,000,000 Republic of Argentina Pro 4, Variable Rate, 1 mo. LIBOR, 5.87%, due 12/28/10 1,985,000 ----------- 106,764,318 ----------- BOSNIA & HERZEGOVINA -- 0.3% DEM 25,244,000 Bosnia & Herzegovina Series A, Step Up, 2.00%, due 12/11/17 2,485,382 DEM 12,335,000 Bosnia & Herzegovina Series B, Zero Coupon, due 12/11/17 151,804 ----------- 2,637,186 ----------- BRAZIL -- 17.5% USD 306,740 Brazil Capitalization Bond, PIK, 8.00%, due 04/15/14 226,605 USD 52,500,000 Brazil DCB (Bearer), Variable Rate, 6 mo. LIBOR + .88%, 7.00%, due 04/15/12 39,046,875 USD 18,000,000 Brazil DCB (Registered), Variable Rate, 6 mo. LIBOR + .88%, 7.00%, due 04/15/12 13,387,500 USD 25,525,000 Brazil Discount ZL Bond, Variable Rate, 6 mo. LIBOR + .81%, 6.94%, due 04/15/24 19,941,406 USD 18,000,000 Brazil FLIRB (Bearer), Variable Rate, Step Up, 5.00%, due 04/15/09 13,680,000 USD 52,320,000 Brazil FLIRB (Registered), Variable Rate, Step Up, 5.00%, due 04/15/09 39,763,200 USD 16,091,423 Brazil MYDFA Trust Certificates, Variable Rate, 6 mo. LIBOR + .81%, 6.81%, due 09/15/07 13,355,881
See accompanying notes to the financial statements. 1 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- BRAZIL -- CONTINUED USD 16,000,000 Brazil New Money Bond, Variable Rate, 6 mo. LIBOR + .88%, 7.00%, due 04/15/09 13,160,000 USD 10,000,000 Republic of Brazil, 12.25%, due 03/06/30 9,490,000 ----------- 162,051,467 ----------- BULGARIA -- 4.3% USD 6,551,707 Bulgaria Discount Bond Series B, Variable Rate, 6 mo. LIBOR + 1.31%, 7.56%, due 07/28/24 5,396,969 USD 18,000,000 Bulgaria Discount Series B Interest Strips, Basket 2, 0.00%, due 07/28/24 3,222,000 USD 39,844,572 Bulgaria FLIRB Series B, Variable Rate, Step Up, 3.25%, due 07/28/12 29,883,429 USD 5,000,000 Bulgaria Par Bond, Series B Strips, Tranche B, 0.00%, due 07/28/24 895,000 ----------- 39,397,398 ----------- COLOMBIA -- 0.4% USD 4,000,000 Republic of Colombia, 11.75%, due 02/25/20 3,870,000 ----------- COSTA RICA -- 0.1% USD 1,000,000 Central Bank of Costa Rica Principal Bond Series A, 6.25%, due 05/21/10 920,000 ----------- DOMINICAN REPUBLIC -- 1.3% USD 17,957,000 Dominican Republic Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 6.88%, due 08/30/24 11,941,405 ----------- ECUADOR -- 2.5% USD 41,465,000 Republic of Ecuador Discount Bond (Global Registered), Variable Rate, 6 mo. LIBOR + .81%, 6.75%, due 02/28/25* 16,586,000 USD 1,000,000 Republic of Ecuador Par Bond, Variable Rate, Step Up, 4.00%, due 02/28/25* 367,500 USD 22,101,904 Republic of Ecuador PDI (Bearer), PIK, Variable Rate, 6 mo. LIBOR +.81%, 6.75%, due 02/27/15* 5,359,712 USD 2,363,840 Republic of Ecuador PDI (Registered), PIK, Variable Rate, 6 mo. LIBOR + .81%, 6.75%, due 02/27/15* 573,231 ----------- 22,886,443 -----------
See accompanying notes to the financial statements. 2 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- IVORY COAST -- 2.5% FRF 25,000,000 Ivory Coast Discount Bond, Variable Rate, Step Up, 3.00%, due 03/31/28 1,247,612 FRF 538,720,000 Ivory Coast FLIRB, Variable Rate, Step Up, 2.00%, due 03/29/18 13,442,274 FRF 260,269,625 Ivory Coast PDI, Variable Rate, Step Up, 1.90%, due 03/29/18 8,786,422 ----------- 23,476,308 ----------- JORDAN -- 3.4% USD 263,000 Hashemite Kingdom of Jordan IAB, 144A, Variable Rate, 6 mo. LIBOR + .81%, 7.00%, due 12/23/05 251,165 USD 25,780,215 Hashemite Kingdom of Jordan Par Bond Series DEF, Variable Rate, Step Up, 144A, 6.00%, due 12/23/23 17,208,294 USD 9,000,000 Hashemite Kingdom of Jordan Par Bond, Variable Rate, Step Up, 6.00%, due 12/23/23 6,097,500 USD 8,105,423 Hashemite Kingdom of Jordan PDI, Variable Rate, 6 mo. LIBOR + .81%, 7.00%, due 12/23/05 7,740,679 ----------- 31,297,638 ----------- MACEDONIA -- 1.6% USD 23,513,118 Macedonia Capitalization Bond, PIK, Variable Rate, 6 mo. LIBOR + .81%, 7.02%, due 07/12/12 15,048,395 ----------- MEXICO -- 11.0% USD 19,000 Mexico Discount Bond Series A Odd Lot, Variable Rate, 6 mo. LIBOR + .81%, 6.93%, due 12/31/19(a) 17,237 USD 6,000,000 Mexico Discount Bond Series D, Variable Rate, 6 mo. LIBOR + .81%, 6.90%, due 12/31/19 5,752,500 DEM 30,000,000 Mexico Discount Bond, Variable Rate, 6 mo. DEM LIBOR + .81%, 4.31%, due 12/31/19 12,682,153 FRF 335,250,000 Mexico Par Bond, 6.63%, due 12/31/19 43,117,914 CHF 72,000,000 Mexico Par Bond, 3.75%, due 12/31/19 29,075,761 USD 3,000,000 Mexico Par Bond, Series A, 6.25%, due 12/31/19 2,441,250 USD 10,500,000 Mexico Par Bond, Series B, 6.25%, due 12/31/19 8,544,375 USD 159,000 Mexico Par Bond, Series B Odd Lot, 6.25%, due 12/31/19(a) 120,840 ----------- 101,752,030 -----------
See accompanying notes to the financial statements. 3 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- NIGERIA -- 2.8% USD 29,500,000 Central Bank of Nigeria Par Bond, Variable Rate, Step Up, 6.25%, due 11/15/20 16,741,250 USD 18,172,706 Nigeria Odd Lot, 6.25%, due 11/15/20(a) 9,404,377 ----------- 26,145,627 ----------- PERU -- 2.1% USD 4,325,000 Peru Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 144A, 6.81%, due 03/08/27 3,243,750 USD 7,775,000 Peru FLIRB, Variable Rate, Step Up, 3.75%, due 03/07/17 4,966,281 USD 5,150,000 Peru FLIRB, Variable Rate, Step Up, 144A, 3.75%, due 03/07/17 3,289,563 USD 14,000,000 Peru Par Bond, Variable Rate, Step Up, 144A, 3.00%, due 03/07/27 5,810,000 USD 3,200,000 Peru PDI, Variable Rate, Step Up, 4.50%, due 03/07/17 2,236,000 ----------- 19,545,594 ----------- QATAR -- 0.2% USD 2,000,000 State of Qatar, 9.50%, due 05/21/09 2,092,500 ----------- RUSSIA -- 0.6% RUB 22,852,579 Russia Federal Loan Bond Series 25021, 15.00%, due 01/17/01(a) 347,964 RUB 114,950,000 Russia Federal Loan Bond Series 25023, 14.00%, due 09/12/01(a) 1,477,929 RUB 41,474,497 Russia Federal Loan Bond Series 26003, 10.00%, due 03/15/05(a) 229,049 USD 10,000,000 Russia Federation, 2.25%, due 03/31/30(b) 3,112,500 ----------- 5,167,442 ----------- SOUTH KOREA -- 0.6% USD 6,000,000 Export Import Bank of Korea, 7.10%, due 03/15/07 5,865,600 ----------- SUPRA NATIONAL -- 0.3% ZAR 100,000,000 International Bank for Reconstruction and Development, Zero Coupon, due 05/14/12* 3,070,279 ----------- TRINIDAD & TOBAGO -- 0.3% USD 3,000,000 Republic of Trinidad & Tobago, 144A , 9.88%, due 10/01/09 3,127,500 -----------
See accompanying notes to the financial statements. 4 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- TUNISIA -- 1.0% JPY 200,000,000 Banque Centrale De Tunisie, 4.35%, due 08/15/17 1,784,170 JPY 800,000,000 Banque National Development Touristique, 4.75%, due 06/09/17 7,063,857 ----------- 8,848,027 ----------- TURKEY -- 0.7% USD 2,000,000 Republic of Turkey, 11.88%, due 01/15/30 2,077,500 USD 4,000,000 Republic of Turkey Notes, 12.00%, due 12/15/08 4,205,000 ----------- 6,282,500 ----------- UKRAINE -- 0.2% USD 3,000,000 Ukraine Government, 11.00%, due 03/15/07 1,680,000 ----------- UNITED STATES -- 1.6% ASSET BACKED SECURITIES -- 0.5% USD 5,000,000 SHYPPCO Finance Company Series 98-1 Class A-2B, 6.64%, due 06/15/10 4,562,500 ----------- U.S. GOVERNMENT AGENCY -- 1.1% USD 1,083,500 Agency for International Development Floater (Support of C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 6.42%, due 10/01/12 1,050,995 USD 9,000,000 Federal Home Loan Bank, Variable Rate, CPI + 3.15%, 5.66%, due 02/15/02(c) 8,757,810 ----------- 9,808,805 ----------- TOTAL UNITED STATES 14,371,305 ----------- VENEZUELA -- 6.1% USD 10,000,000 Republic of Venezuela, 9.25%, due 09/15/27 6,750,000 USD 1,650,288 Republic of Venezuela DCB DL Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 7.00%, due 12/18/07(a) 1,291,351 USD 1,129,307 Republic of Venezuela DCB IL, Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 7.00%, due 12/18/08(a) 855,450 USD 15,965,217 Republic of Venezuela DCB IL, Variable Rate, 6 mo. LIBOR + .88%, 7.00%, due 12/18/08 12,891,913 USD 5,000,000 Republic of Venezuela Discount Bond Series A, Variable Rate, 6 mo. LIBOR + .81%, 7.00%, due 03/31/20 3,862,500
See accompanying notes to the financial statements. 5 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- VENEZUELA -- CONTINUED USD 182,143 Republic of Venezuela FLIRB Series A Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 6.88%, due 03/31/07(a) 142,299 USD 522,857 Republic of Venezuela FLIRB Series B Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 6.88%, due 03/31/07 411,097 CHF 28,571,392 Republic of Venezuela FLIRB, Variable Rate, CHF, 6 mo. LIBOR + .88%, 2.75%, due 03/31/07 12,888,722 USD 8,877,180 Republic of Venezuela New Money Bond Series A Odd Lot, Variable Rate, 6 mo. LIBOR + 1%, 7.13%, due 12/18/05(a) 6,835,429 USD 6,141,177 Republic of Venezuela New Money Bond Series A, Variable Rate, 6 mo. LIBOR + 1%, 7.13%, due 12/18/05 5,035,765 USD 739,059 Republic of Venezuela New Money Bond Series B Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 7.00%, due 12/18/05(a) 569,084 DEM 1,070,000 Republic of Venezuela New Money Bond Series B, Variable Rate, DEM, 6 mo. LIBOR + .88%, 4.44%, due 12/18/05 389,781 FRF 39,175,000 Republic of Venezuela Par Bond, 7.71%, due 03/31/20 4,355,644 ----------- 56,279,035 ----------- VIETNAM -- 1.3% USD 4,000,000 Vietnam Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 6.81%, due 03/13/28 2,240,000 USD 19,000,000 Vietnam Par Bond, Variable Rate, Step Up, 3.00%, due 03/12/28 6,270,000 USD 6,591,000 Vietnam PDI, Variable Rate, Step Up, 3.50%, due 03/14/16 3,427,320 ----------- 11,937,320 ----------- TOTAL DEBT OBLIGATIONS (COST $696,676,554) 686,455,317 ----------- LOAN ASSIGNMENTS -- 20.8% ALGERIA -- 6.7% JPY 495,430,068 Algeria Tranche 1, JPY 6 mo. LIBOR + .8125%, (1.0625%) 3,089,250 USD 3,085,714 Algeria Tranche 2, USD 6 mo. LIBOR + .8125%, (6.8125%) 2,345,143 JPY 8,431,773,548 Algeria Tranche 3 Loan Agreement, JPY, 6 mo. LIBOR + .8125%, (1.0625%) 44,709,008 FRF 90,564,324 Algeria Tranche 3, FRF 6 mo. LIBOR + .8125%, (3.9375%) 8,773,276 JPY 550,000,000 Algeria Tranche S1, JPY Long Term Prime + .8125%, (1.0625%) 2,853,761 ----------- 61,770,438 -----------
See accompanying notes to the financial statements. 6 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- CAMEROON -- 0.2% NLG 23,084,718 Cameroon Loan Agreement, (No Tranche specified, dated January 31, 1981)* 1,411,999 FRF 18,396,841 Republic of Cameroon Tranche B, (dated January 30, 1979)* 378,035 ----------- 1,790,034 ----------- CONGO REPUBLIC (BRAZZAVILLE) -- 0.3% EUR 8,195,761 Republic of Congo Loan Agreement* 848,269 FRF 102,097,964 Republic of Congo Loan Agreement* 1,610,965 USD 5,295,244 Republic of Congo Loan Agreement* 622,191 ----------- 3,081,425 ----------- MOROCCO -- 3.3% JPY 1,301,299,530 Morocco Restructuring and Consolidating Agreement Tranche A, JPY Long Term Prime + .1175%, (2.03175%) 10,068,769 USD 21,789,474 Morocco Tranche A, USD 6 mo. LIBOR + .8125%, (6.84375%) 20,264,210 ----------- 30,332,979 ----------- RUSSIA -- 10.3% DEM 15,000,000 International Bank for Economic Cooperation Loan Agreement* 738,408 EUR 5,000,000 International Bank for Economic Cooperation Loan Agreement* 481,400 DEM 5,208,190 Russia Foreign Trade Obligations(a)* 515,974 USD 396,440,309 Russia Vnesh Restructured Loan Agreements* 93,659,023 ----------- 95,394,805 ----------- YUGOSLAVIA -- 0.0% USD 1,400,368 Yugoslavia New Financing Agreement Tranche A* 101,527 USD 1,499,573 Yugoslavia New Financing Agreement Tranche C* 108,719 ----------- 210,246 ----------- TOTAL LOAN ASSIGNMENTS (COST $248,948,743) 192,579,927 ----------- LOAN PARTICIPATIONS -- 1.2% CAMEROON -- 0.0% NLG 4,968,184 Cameroon Loan Agreement, (No Tranche specified, dated January 31, 1981), (Participation with Salomon)* 303,884 -----------
See accompanying notes to the financial statements. 7 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- INDONESIA -- 0.4% USD 480,000 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (6.75%), (Participation with Salomon) 307,200 USD 480,000 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (6.8125%), (Participation with Salomon) 307,200 USD 640,000 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (6.875%), (Participation with Salomon) 409,600 USD 558,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (6.75%), (Participation with Salomon) 371,070 USD 1,302,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (6.875%), (Participation with Salomon) 865,830 USD 570,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (6.75%), (Participation with Salomon) 384,750 USD 1,330,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (6.875%), (Participation with Salomon) 897,750 ----------- 3,543,400 ----------- JAMAICA -- 0.4% USD 4,312,500 Jamaica Refinancing Agreement Tranche B, LIBOR + .8125%, (6.9375%), (Participation with Chase Manhattan Bank and Salomon) 3,622,500 ----------- MOROCCO -- 0.3% JPY 329,400,722 Morocco Restructuring and Consolidating Agreement Tranche A, JPY Long Term Prime + .2175%, (3.0175%), (Participation with J.P. Morgan) 2,548,729 ----------- RUSSIA -- 0.1% DEM 3,500,000 International Bank for Economic Cooperation Loan Agreement, (Participation with Salomon)* 172,295 JPY 900,000,000 International Investment Bank Loan Agreement, (Participation with Bank of America)* 819,262 ----------- 991,557 ----------- YUGOSLAVIA -- 0.0% USD 2,100,416 Yugoslavia New Financing Agreement Tranche B, (Participation with Chase Manhattan Bank)* 152,280
8 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- YUGOSLAVIA -- CONTINUED USD 352,431 Yugoslavia New Financing Agreement Tranche C, (Participation with Chase Manhattan Bank)* 25,551 ----------- 177,831 ----------- TOTAL LOAN PARTICIPATIONS (COST $13,568,564) 11,187,901 ----------- PROMISSORY NOTES -- 0.8% KENYA -- 0.6% GBP 672,890 Republic of Kenya Promissory Notes, 0.00%, due 1/30/03(a) 592,971 GBP 1,856,250 Republic of Kenya Promissory Notes, 0.00%, due 7/30/02(a) 1,807,509 GBP 672,890 Republic of Kenya Promissory Notes, 0.00%, due 1/30/02(a) 724,058 GBP 1,856,250 Republic of Kenya Promissory Notes, 0.00%, due 7/30/01(a) 2,207,224 ----------- 5,331,762 ----------- NIGERIA -- 0.1% USD 3,000,000 Nigeria Promissory Notes, 5.09%, due 1/5/10 1,080,000 ----------- ROMANIA -- 0.1% USD 599,637 Romania Trade Finance Promissory Notes, 0.00%, due 12/5/01(a) 383,348 USD 643,236 Romania Trade Finance Promissory Notes, 0.00%, due 6/5/01(a) 466,732 ----------- 850,080 ----------- TOTAL PROMISSORY NOTES (COST $8,696,744) 7,261,842 ----------- PRINCIPAL AMOUNT ------------- CALL OPTIONS PURCHASED -- 0.2% OPTIONS ON BONDS -- 0.0% USD 14,000,000 Republic of Venezuela Global Bond, Expires 3/30/00, Strike 67.75 147,000 ----------- OPTIONS ON FUTURES -- 0.2% USD 5,385,000 Eurodollar, Expires 3/13/00, Strike 93.75 296,175
See accompanying notes to the financial statements. 9 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PRINCIPAL AMOUNT DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- OPTIONS ON FUTURES -- CONTINUED USD 40,000,000 U.S. Treasury Bond, Expires 5/20/00, Strike 92 1,387,500 ----------- 1,683,675 ----------- TOTAL CALL OPTIONS PURCHASED (COST $1,586,141) 1,830,675 ----------- PUT OPTIONS PURCHASED -- 0.2% OPTIONS ON CURRENCY -- 0.2% USD 50,000,000 Euro, Expires 3/06/00, Strike .996 1,680,000 USD 20,000,000 Japanese Yen, Expires 3/7/00, Strike 108 385,000 ----------- 2,065,000 ----------- TOTAL PUT OPTIONS PURCHASED (COST $1,752,500) 2,065,000 ----------- SHARES ------------- RIGHTS AND WARRANTS -- 0.0% MEXICO -- 0.0% 29,000 United Mexican States Recovery Warrants, Expires 6/30/03** -- 148,605,000 United Mexican States Warrants, Expires 6/30/03** -- ----------- -- ----------- NIGERIA -- 0.0% 45,710 Central Bank of Nigeria Payment Adjusted Warrants, Expires 11/15/20** -- ----------- VENEZUELA -- 0.0% 74,355 Republic of Venezuela Recovery Warrants, Expires 4/15/20** -- ----------- TOTAL RIGHTS AND WARRANTS (COST $0) -- -----------
See accompanying notes to the financial statements. 10 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 4.2% REPURCHASE AGREEMENTS -- 0.2% EUR 2,131,466 JP Morgan Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $2,052,265 and an effective yield of 1.65%, collateralized by a Turkish Government Bond with a rate of 9.625%, maturity date of 11/30/06 and a market value, including accrued interest, of $2,110,493. 2,052,170 ----------- CASH EQUIVALENTS -- 0.5% USD 3,237,602 BankBoston Eurodollar Time Deposit, 6.1175%, due 4/28/00(d) 3,237,602 USD 346,287 First Union National Bank Time Deposit, 5.8125%, due 3/01/00(d) 346,287 USD 519,431 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(d) 519,431 USD 500,000 Prudential Securities Group, Inc. Master Note, 6.1875%, due 3/10/00(d) 500,000 ----------- 4,603,320 ----------- COMMERCIAL PAPER -- 3.5% USD 31,900,000 Koch Industries Inc., 5.83%, due 3/01/00 31,900,000 ----------- TOTAL SHORT-TERM INVESTMENTS (COST $38,555,490) 38,555,490 ----------- TOTAL INVESTMENTS -- 101.7% (Cost $1,009,784,736) 939,936,152 Other Assets and Liabilities (net) -- (1.7%) (15,474,158) ----------- TOTAL NET ASSETS -- 100.0% $924,461,994 ===========
See accompanying notes to the financial statements. 11 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000 NOTES TO SCHEDULE OF INVESTMENTS: 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. DCB - Debt Conversion Bond FLIRB - Front Loaded Interest Reduction Bond IAB - Interest Arrears Bond PDI - Past Due Interest PIK - Payment In Kind Variable and Step up rates - The rates shown on variable and step up rate notes are the current interest rates at February 29, 2000, which are subject to change based on the terms of the security, including varying reset dates. CURRENCY ABBREVIATIONS: ARS - Argentine Peso CHF - Swiss Franc DEM - German Mark EUR - Euro FRF - French Franc GBP - British Pound JPY - Japanese Yen NLG - Netherlands Guilder RUB - Russian Ruble USD - United States Dollar ZAR - South African Rand (a) Valued by management (Note 1). * Non-performing. Borrower not currently paying interest. (b) When issued security (Note 1). (c) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). ** Non-income producing security. (d) Represents investments of security lending collateral (Note 1). 12 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $1,009,784,736) (Note 1) $ 939,936,152 Cash 192,102 Cash at interest on deposit at brokers (Note 1) 4,857,604 Receivable for investments sold 14,295,268 Receivable for Fund shares sold 309 Interest receivable 15,963,494 Net receivable for open forward foreign currency contracts (Notes 1 and 6) 7,486,070 Receivable for variation margin on open futures contracts (Notes 1 and 6) 19,439 Receivable for open swap contracts (Notes 1 and 6) 37,386,833 Receivable for expenses waived or borne by Manager (Note 2) 28,358 Miscellaneous receivable 35,440 ------------- Total assets 1,020,201,069 ------------- LIABILITIES: Payable for investments purchased 76,361,496 Payable upon return of securities loaned (Note 1) 4,603,320 Payable for Fund shares repurchased 14,211,440 Payable to affiliate for (Note 2): Management fee 253,885 Shareholder service fee 87,291 Payable for closed swap contracts (Notes 1 and 6) 48,763 Accrued expenses and other liabilities 172,880 ------------- Total liabilities 95,739,075 ------------- NET ASSETS $ 924,461,994 ============= NET ASSETS CONSIST OF: Paid-in capital $ 940,720,322 Accumulated undistributed net investment income 28,595,715 Accumulated undistributed net realized loss (18,802,077) Net unrealized depreciation (26,051,966) ------------- $ 924,461,994 ============= NET ASSETS ATTRIBUTABLE TO: Class III shares $ 378,593,292 ============= Class IV shares $ 545,868,702 ============= SHARES OUTSTANDING: Class III 43,309,512 ============= Class IV 62,483,099 ============= NET ASSET VALUE PER SHARE: Class III $ 8.74 ============= Class IV $ 8.74 =============
See accompanying notes to the financial statements. 13 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest (including securities lending income of $15,159) $ 95,641,508 ------------ Total income 95,641,508 ------------ EXPENSES: Management fee (Note 2) 2,943,719 Custodian fees 452,647 Audit fees 99,734 Legal fees 94,486 Transfer agent fees 35,047 Trustees fees (Note 2) 9,746 Registration fees 3,166 Miscellaneous 9,933 Fees waived or borne by Manager (Note 2) (252,112) ------------ 3,396,366 Shareholder service fee (Note 2) Class III 661,663 Class IV 399,954 ------------ Net expenses 4,457,983 ------------ Net investment income 91,183,525 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (7,696,071) Closed futures contracts 1,044,534 Closed swap contracts 32,344,540 Written options (9,735,695) Foreign currency, forward contracts and foreign currency related transactions 16,201,508 ------------ Net realized gain 32,158,816 ------------ Change in net unrealized appreciation (depreciation) on: Investments 176,454,223 Open futures contracts (262,049) Open swap contracts 16,219,852 Written options 10,871,437 Foreign currency, forward contracts and foreign currency related transactions 793,630 ------------ Net unrealized gain 204,077,093 ------------ Net realized and unrealized gain 236,235,909 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $327,419,434 ============
14 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 91,183,525 $ 80,159,030 Net realized gain (loss) 32,158,816 (59,206,097) Change in net unrealized appreciation (depreciation) 204,077,093 (318,647,695) ------------- ------------- Net increase (decrease) in net assets from operations 327,419,434 (297,694,762) ------------- ------------- Distributions to shareholders from: Net investment income Class III (51,599,442) (7,987,181) Class IV (57,663,578) (9,997,511) ------------- ------------- Total distributions from net investment income (109,263,020) (17,984,692) ------------- ------------- Net realized gains Class III (5,234,784) (33,861,250) Class IV (6,680,035) (42,566,783) ------------- ------------- Total distributions from net realized gains (11,914,819) (76,428,033) ------------- ------------- In excess of net realized gains Class III (46,638) (58,659) Class IV (59,515) (73,741) ------------- ------------- Total distributions in excess of net realized gains (106,153) (132,400) ------------- ------------- (121,283,992) (94,545,125) ------------- ------------- Net share transactions: (Note 5) Class III (175,611,247) 168,649,238 Class IV 120,316,839 226,245,142 ------------- ------------- Increase (decrease) in net assets resulting from net share transactions (55,294,408) 394,894,380 ------------- ------------- Total increase in net assets 150,841,034 2,654,493 NET ASSETS: Beginning of period 773,620,960 770,966,467 ------------- ------------- End of period (including accumulated undistributed net investment income of $28,595,715 and $14,414,488, respectively) $ 924,461,994 $ 773,620,960 ============= =============
See accompanying notes to the financial statements. 15 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 6.89 $ 11.64 $ 14.09 $ 11.76 $ 8.39 -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.84+ 0.92+ 1.13+ 1.48 1.35 Net realized and unrealized gain (loss) 2.20 (4.41) 1.51 6.40 3.84 -------- -------- -------- -------- -------- Total from investment operations 3.04 (3.49) 2.64 7.88 5.19 -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (1.07) (0.23) (0.84) (1.58) (1.17) From net realized gains (0.12) (1.03) (4.25) (3.97) (0.65) In excess of net realized gains --(a) --(a) -- -- -- -------- -------- -------- -------- -------- Total distributions (1.19) (1.26) (5.09) (5.55) (1.82) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 8.74 $ 6.89 $ 11.64 $ 14.09 $ 11.76 ======== ======== ======== ======== ======== TOTAL RETURN(b) 46.81% (32.94)% 22.27% 74.32% 63.78% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $378,593 $450,336 $460,387 $555,452 $615,485 Net expenses to average daily net assets 0.56% 0.56% 0.53% 0.57% 0.50% Net investment income to average daily net assets 10.82% 10.99% 8.62% 8.35% 12.97% Portfolio turnover rate 123% 272% 255% 152% 158% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: --(c) $ 0.02 $ 0.03 $ 0.03 $ 0.02
+ Computed using average shares outstanding throughout the period. (a) The distribution in excess of net realized gains was less than $.001. (b) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (c) Fees and expenses waived or borned by the Manager were less than $0.01 per share. 16 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ---------------------------------- 2000 1999 1998** -------- -------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 6.90 $ 11.63 $ 10.99 -------- -------- -------- Income from investment operations: Net investment income 0.84+ 0.91+ 0.10+ Net realized and unrealized gain (loss) 2.20 (4.37) 0.54 -------- -------- -------- Total from investment operations 3.04 (3.46) 0.64 -------- -------- -------- Less distributions to shareholders: From net investment income (1.08) (0.24) -- From net realized gains (0.12) (1.03) -- In excess of net realized gains --(a) --(a) -- -------- -------- -------- Total distributions (1.20) (1.27) 0.00 -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 8.74 $ 6.90 $ 11.63 ======== ======== ======== TOTAL RETURN(b) 47.00% (32.82)% 5.82% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $545,869 $323,285 $310,580 Net expenses to average daily net assets 0.51% 0.51% 0.50%* Net investment income to average daily net assets 10.87% 10.87% 7.17%* Portfolio turnover rate 123% 272% 255% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: --(c) $ 0.02 --(c)
* Annualized. ** Period from January 9, 1998 (commencement of operations) to February 28, 1998. + Computed using average shares outstanding throughout the period. (a) The distribution in excess of net realized gains was less than $.001. (b) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (c) Fees and expenses waived or borne by the Manager were less than $0.01 per share. See accompanying notes to the financial statements. 17 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Emerging Country Debt Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks to earn high total return through investment in sovereign debt of developing countries in Asia, Latin America, the Middle East, Africa and Europe. The Fund's benchmark is the J.P. Morgan Emerging Markets Bond Index Global. The Fund offers two classes of shares: Class III and Class IV. The principal economic difference between the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully outlined in the Trust's prospectus. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. At February 29, 2000, the total value of these securities represented 4% of net assets. 18 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market-makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. At February 29, 2000, the total value of these securities represented 17% of net assets. Included in this total are U.S. Government backed securities and other highly rated collateralized debt obligations that represent 1% of net assets at February 29, 2000. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FUTURES CONTRACTS The Fund may use futures contracts to manage its exposure to the bond and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the 19 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- change in value ("variation margin") is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 29, 2000. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an 20 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 29, 2000 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. The risk associated with purchasing put and call options is limited to the premium paid. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the lender) that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. Direct indebtedness of emerging countries involves a risk that the governmental entities responsible for the repayment of the debt may be unable or unwilling to pay the principal and interest when due. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. 21 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Credit default swaps involve the payment of a specified rate based on the notional amount. The Fund receives payment upon a default of the underlying security. In connection with these agreements, cash or securities may be set aside as collateral by the Funds custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral, which is paid by the counterparty. At February 29, 2000, $4,857,604 in cash has been set aside. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform and that there may be unfavorable changes in the fluctuation of interest rates. See Note 6 for a summary of open swap agreements as of February 29, 2000. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. 22 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund was sold may decline below the contracted repurchase price under the agreement. At February 29, 2000, the Fund had not entered into a reverse repurchase agreement. DELAYED DELIVERY COMMITMENTS The Fund may purchase or sell securities on a when-issued or forward commitment basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Collateral consisting of liquid securities or cash and cash equivalents is maintained in an amount at least equal to these commitments with the custodian. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund loaned securities having a market value of $4,499,166 collateralized by cash in the amount of $4,603,320, which was invested in short-term instruments. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be 23 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. The Fund declares separate dividends from net investment income on each class of shares. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to the differing treatments for foreign currency transactions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $32,260,722 $(38,765,595) $6,504,873
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis, and is adjusted for the accretion of discounts. Income is not recognized and discounts are not amortized on securities for which collection is not expected. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of these securities is recorded as interest income. 24 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .50% of the amount invested. In the case of cash redemptions, the fee is .25% of the amount redeemed. These fees will be reduced by 50% with respect to any portion of a purchase or redemption that is offset by a corresponding redemption or purchase, respectively, occurring on the same day. In addition, the purchase premium or redemption fee for the Fund will be reduced by 50% if the purchaser makes an in-kind purchase of Fund shares or if the purchase or redemption is part of a transfer from or to another Fund where the Manager is able to transfer securities among the Funds to effect the transaction. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. These fees are allocated relative to each class net assets on the share transaction date. Purchase premiums are included as part of each class "shares sold" and redemption fees are included as part of each class "shares repurchased", respectively, as summarized in Note 5. For the year ended February 29, 2000, the Fund received $344,391 in purchase premiums and $557,354 in redemption fees. There is no premium for reinvested distributions. INVESTMENT RISK Investments in emerging country debt present certain risks that are not inherent in many other securities. Many emerging countries present elements of political and/or economic instability, which may result in the Fund's inability to collect on a timely basis, or in full, principal and interest payments. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities or bank loans which are in default at the time of acquisition in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging country debt are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .35% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder 25 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .15% for Class III shares and .10% for Class IV shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Funds total annual operating expenses (excluding custody fees, brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000 was $9,746. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $975,104,585 and $983,547,456, respectively. At February 29, 2000, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $1,018,837,352 $74,343,418 $(153,244,618) $(78,901,200)
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 38.5% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Funds outstanding shares. 26 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 --------------------------- --------------------------- Shares Amount Shares Amount Class III: ------------ ------------- ------------ ------------- Shares sold 8,327,628 $ 64,234,029 45,405,396 $ 367,745,404 Shares issued to shareholders in reinvestment of distributions 5,357,740 41,374,128 3,380,175 32,138,997 Shares repurchased (35,692,441) (281,219,404) (23,019,717) (231,235,163) ------------ ------------- ------------ ------------- Net increase (decrease) (22,007,073) $(175,611,247) 25,765,854 $ 168,649,238 ============ ============= ============ ============= Year Ended Year Ended February 29, 2000 February 28, 1999 --------------------------- --------------------------- Shares Amount Shares Amount Class IV: ------------ ------------- ------------ ------------- Shares sold 22,519,103 $ 171,859,561 21,916,084 $ 239,168,023 Shares issued to shareholders in reinvestment of distributions 7,990,878 62,255,370 5,400,677 51,286,039 Shares repurchased (14,912,078) (113,798,092) (7,130,859) (64,208,920) ------------ ------------- ------------ ------------- Net increase 15,597,903 $ 120,316,839 20,185,902 $ 226,245,142 ============ ============= ============ =============
27 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- --------------------------------------------- ----------------- ------------ -------------- Buys 3/01/00 EUR 40,534,864 $39,029,804 $ (329,479) 3/23/00 EUR 40,500,000 39,058,605 (204,930) 3/03/00 GBP 1,500,000 2,368,022 (1,228) 4/21/00 JPY 1,689,190,000 15,516,492 16,492 ---------- $ (519,145) ========== Sales 3/14/00 CHF 63,000,000 $37,818,381 $2,449,818 3/01/00 EUR 40,529,409 39,024,552 207,798 3/23/00 EUR 87,100,000 84,000,111 4,501,639 3/03/00 GBP 1,500,000 2,368,021 22,094 5/05/00 GBP 1,500,000 2,367,801 1,217 4/21/00 JPY 6,600,000,000 60,558,515 786,616 3/10/00 ZAR 9,200,000 1,448,317 36,033 ---------- $8,005,215 ==========
28 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Expiration Contract Appreciation Contracts Type Date Value (Depreciation) ---------------------------- --------------------------------------------- -------------- ----------- -------------- Buys 6 Japanese Government Bond 10 Yr. March 2000 $ 7,218,242 $ (2,412) ========= Sales 100 90 Day Euro Dollar September 2000 $23,292,500 $ (1,900) 6 Japanese Government Bond 10 Yr. March 2000 7,216,058 (183,328) 6 Japanese Government Bond 10 Yr. June 2000 7,145,055 1,229 --------- $(183,999) =========
At February 29, 2000, the Fund has cash and/or securities to cover any margin requirements on open futures contracts. WRITTEN OPTION TRANSACTIONS
Puts Calls Principal Amount Principal Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ---------------- -------------- ---------------- ------------ Outstanding, beginning of period 17,500 $ 713,125 17,500 $ 836,938 Options written 40,000 1,250,000 50,000 550,000 Options closed -- -- -- -- Options exercised -- -- (50,000) (550,000) Options expired (57,500) (1,963,125) -- -- Options sold -- -- (17,500) (836,938) -------- ----------- -------- --------- Outstanding, end of period -- $ -- -- $ -- ======== =========== ======== =========
29 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS
Net Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------------- ---------- -------------------------------------------------- -------------- CREDIT DEFAULT SWAPS 10,000,000 USD 9/15/00 Agreement with Morgan Guaranty Trust Company dated $ (199,914) 9/10/98 to pay 2.20% per year times the notional amount. The Fund receives payment only upon a default event in Poland, the notional amount times the difference between the par value and the then- market value of Republic of Poland Past Due Interest PDI Brady Bond due 10/27/14. 15,000,000 USD 11/03/00 Agreement with Credit Suisse Financial Products (159,695) dated 10/29/97 to pay 3.45% per year times the notional amount. The Fund receives payment only upon a default event in Bulgaria, the notional amount times the difference between 59.50 USD and the then-market value of Bulgaria FLIRB Note Series A due 7/28/12. 10,000,000 USD 11/07/00 Agreement with Credit Suisse Financial Products (228,327) dated 11/04/97 to pay 3.50% per year times the notional amount. The Fund receives payment only upon a default event in Brazil, the notional amount times the difference between 74.75 USD and the then-market value of Brazil Debt Conversion "DCB" Bond due 4/15/12.
30 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------- ---------- -------------------------------------------------- -------------- 10,000,000 USD 12/18/00 Agreement with Morgan Guaranty Trust Company dated $ (424,707) 12/11/98 to pay 6.50% per year times the notional amount. The Fund receives payment only upon a default event in Argentina, the notional amount times the difference between the par value and the then-market value of Republic of Argentina Floating Rate Bond due 3/31/05. 20,000,000 USD 3/01/01 Agreement with Morgan Guaranty Trust Company dated (904,163) 2/24/99 to pay 4.60% per year times the notional amount. The Fund receives payment only upon a default event in Bulgaria, the notional amount times the difference between the par value and the then-market value of Bulgaria IAB Floating Rate Bond due 7/28/11. 25,411,280 USD 5/29/01 Agreement with Credit Suisse Financial Products 16,519,718 dated 5/21/97 to pay 4.78% per year times the notional amount. The Fund receives payment only upon a default event in Ecuador, the current notional amount times the difference between the par value and the then-market value of Republic of Ecuador Past Due Interest PDI Floating Rate Note due 2/27/15. * +
31 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------- ---------- -------------------------------------------------- -------------- 55,550,240 USD 5/29/01 Agreement with Credit Suisse Financial Products $14,040,786 dated 5/23/97 to pay 3.30% per year times the notional amount. The Fund receives payment only upon a default event in Ecuador, the current notional amount times the difference between 60.25 USD and the then-market value of the Republic of Ecuador Past Due Interest PDI Floating Rate Note due 2/27/15. * + 25,000,000 USD 9/10/01 Agreement with Credit Suisse Financial Products (88,176) dated 9/05/97 to pay 1.75% per year times the notional amount. The Fund receives payment only upon a default event in Brazil, the notional amount times the difference between 83.625 USD and the then-market value of Brazil Debt Conversion "DCB" Bond due 4/15/12. 15,000,000 USD 6/05/02 Agreement with Lehman Brothers International (939,880) (Europe) dated 5/25/99 to pay 3.75% per year times the notional amount. The Fund receives payment only upon a default event in Mexico, the notional amount times the difference between the par value and the then-market value of United Mexican States, 9.875% due 1/15/07.
32 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------- ---------- -------------------------------------------------- -------------- 10,000,000 USD 5/15/03 Agreement with Banque Paribas dated 5/12/98 to pay $ 33,005 .75% per year times the notional amount. The Fund receives payment only upon a default event, the notional amount times the difference between the par value and the then-market value of any series of Banco Latinoamericano de Exportaciones S.A. Euro Medium Term Notes. 10,000,000 USD 5/15/03 Agreement with Banque Paribas dated 10/01/98 to (653,704) pay 3.50% per year times the notional amount. The Fund receives payment only upon a default event, the notional amount times the difference between the par value and the then-market value of any series of Banco Latinoamericano de Exportaciones S.A. Euro Medium Term Notes. 15,000,000 USD 6/20/03 Agreement with Goldman Sachs International dated 2,875,572 1/14/99 to receive 11.60% per year times the notional amount. The Fund pays only upon a default event in Colombia, the notional amount times the difference between the par value and the then-market value of Republic of Colombia, 7.625% due 2/15/07.
33 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------- ---------- -------------------------------------------------- -------------- INTEREST RATE SWAPS 2,400,000 CHF 6/05/05 Agreement with Morgan Guaranty Trust Company dated $ 37,126 6/03/98 to pay the notional amount multiplied by 3.245% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 3,300,000 CHF 6/10/05 Agreement with Credit Suisse Financial Products 50,351 dated 6/08/98 to pay the notional amount multiplied by 3.2625% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 2,500,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust Company dated 39,484 6/09/98 to pay the notional amount multiplied by 3.245% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread.
34 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------- ---------- -------------------------------------------------- -------------- 13,500,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust Company dated $ 433,866 9/30/98 to pay the notional amount multiplied by 3.245% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 15,000,000 EUR 2/22/07 Agreement with UBS AG dated 2/18/00 to pay the (142,849) notional amount multiplied by 5.76% and to receive the notional amount multiplied by 6 month Floating Rate Euro LIBOR. TOTAL RETURN SWAPS 6,877,500 USD/ 7,000,000 USD 3/03/00 Agreement with Morgan Guaranty Trust Company dated 387,841 2/01/00 to receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of Republic of Argentina Global Bond, 12.00% due 2/01/20 and to pay initial market value multiplied by 1 month LIBOR adjusted by a specified spread.
35 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------- ---------- -------------------------------------------------- -------------- 8,235,944 USD/ 8,000,000 USD 3/08/00 Agreement with Deutsche Bank AG dated 2/04/00 to $ 170,488 receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of Republic of Argentina, 11.75% due 4/07/09 and to pay initial market value multiplied by 1 month LIBOR adjusted by a specified spread. 8,515,524 USD/ 7,000,000 USD 3/13/00 Agreement with Morgan Guaranty Trust Company dated 158,559 2/24/00 to receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of United Mexican States, 11.375% due 9/15/16 and to pay initial market value multiplied by 1 month LIBOR adjusted by a specified spread. 9,496,813 USD/ 12,000,000 USD 3/14/00 Agreement with Deutsche Bank AG dated 2/25/00 to 195,000 receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of Brazil Discount ZL Floating Rate Note due 4/15/24 and to pay initial market value multiplied by 1 month LIBOR adjusted by a specified spread.
36 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------- ---------- -------------------------------------------------- -------------- 10,765,600 USD/ 12,000,000 USD 3/15/00 Agreement with Morgan Guaranty Trust Company dated $ 244,190 12/13/99 to receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of Brazil Capitalization Floating Rate Note due 4/15/14 and to pay initial market value multiplied by 3 month LIBOR adjusted by a specified spread. 5,156,209 USD/ 5,500,000 USD 3/16/00 Agreement with Morgan Guaranty Trust Company dated 142,578 12/14/99 to receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of Mexico Discount Floating Rate Note Series D due 12/31/19 and to pay initial market value multiplied by 3 month LIBOR adjusted by a specified spread. 10,608,889 USD/ 14,000,000 USD 3/21/00 Agreement with Deutsche Bank AG dated 2/16/00 to (94,537) receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of Republic of Bulgaria FLIRB Series A Floating Rate Note due 7/28/12 and to pay initial market value multiplied by 1 month LIBOR adjusted by a specified spread.
37 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------- ---------- -------------------------------------------------- -------------- 12,697,929 USD/ 13,000,000 USD 3/22/00 Agreement with Morgan Guaranty Trust Company dated $ 83,959 2/17/00 to receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of Mexico Discount Floating Rate Note Series A due 12/31/19 and to pay initial market value multiplied by 1 month LIBOR adjusted by a specified spread. 17,275,385 USD/ 22,000,000 USD 3/23/00 Agreement with Deutsche Bank AG dated 2/18/00 to 476,526 receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of Brazil Discount ZL Floating Rate Note due 4/15/24 and to pay initial market value multiplied by 1 month LIBOR adjusted by a specified spread. 17,325,375 USD/ 23,500,000 USD 4/03/00 Agreement with Deutsche Bank AG dated 9/29/99 to 2,038,131 receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of Republic of Argentina Discount Floating Rate Note due 3/31/23 and to pay initial market value multiplied by 4 month LIBOR adjusted by a specified spread.
38 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------- ---------- -------------------------------------------------- -------------- 4,804,570 USD/ 5,000,000 USD 4/07/00 Agreement with Morgan Guaranty Trust Company dated $ 69,496 2/22/00 to receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of Mexico Discount Floating Rate Note Series D due 12/31/19 and to pay initial market value multiplied by 2 month LIBOR adjusted by a specified spread. 10,205,694 USD/ 10,000,000 USD 4/14/00 Agreement with Morgan Guaranty Trust Company dated (319,046) 1/12/00 to receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of Republic of Argentina, 11.375% due 1/30/17 and to pay initial market value multiplied by 3 month LIBOR adjusted by a specified spread. 14,531,750 USD/ 18,500,000 USD 4/28/00 Agreement with Deutsche Bank AG dated 10/26/99 to 754,431 receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of Republic of Argentina Discount Floating Rate Note due 3/31/23 and to pay initial market value multiplied by 6 month LIBOR adjusted by a specified spread.
39 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------- ---------- -------------------------------------------------- -------------- 17,707,500 USD/ 15,000,000 USD 5/04/00 Agreement with Morgan Guaranty Trust Company dated $ 826,218 2/04/00 to receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of United Mexican States, 11.375% due 9/15/16 and to pay initial market value multiplied by 3 month LIBOR adjusted by a specified spread. 9,997,050 USD/ 12,600,000 USD 5/22/00 Agreement with Morgan Guaranty Trust Company dated 453,342 11/18/99 to receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of Republic of Argentina Discount L Floating Rate Note due 3/31/23 and to pay initial market value multiplied by 3 month LIBOR adjusted by a specified spread. 15,000,000 USD 5/25/00 Agreement with Morgan Guaranty Trust Company dated 196,642 5/25/99 to (pay) receive the notional amount multiplied by the return on the Merrill Lynch High Yield Corporate Index and to receive the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. +
40 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------- ---------- -------------------------------------------------- -------------- 13,164,444 USD/ 16,000,000 USD 8/18/00 Agreement with Morgan Guaranty Trust Company dated $ 288,752 2/16/00 to receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of Republic of Argentina Discount L Floating Rate Note due 3/31/23 and to pay initial market value multiplied by 6 month LIBOR adjusted by a specified spread. 19,344,922 USD/ 25,000,000 USD 11/09/00 Agreement with Deutsche Bank AG dated 2/07/00 to 780,796 receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of Brazil Discount ZL Floating Rate Note due 4/15/24 and to pay initial market value multiplied by 1 month LIBOR adjusted by a specified spread. 8,157,639 USD/ 10,000,000 USD 11/14/00 Agreement with Deutsche Bank AG dated 2/09/00 to 244,974 receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of Republic of Argentina Discount Floating Rate Note due 3/31/23 and to pay initial market value multiplied by 9 month LIBOR adjusted by a specified spread. ----------- $37,386,833 ===========
41 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED See Notes to the Schedule of Investments for definitions of currency abbreviations. + This swap agreement is valued by management (Note 1) During April * 2000, contract settlement was triggered by an event of default on the underlying debt instruments. The counterparty to the swap agreements made an initial determination of amounts due to the Fund under procedures specified by the swap agreements. The Fund does not agree with certain elements of the determination and is currently in negotiation with the counterparty over amounts approximating 10 - 20% of the settlement date value of these swaps. All undisputed amounts have been paid to the Fund by the counterparty. The outcome of those negotiations is not currently predictable. 42 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- The Fund elected to defer to March 1, 2000 post October losses of $11,831,694. For the fiscal year ended February 29, 2000, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 1% of the distributions as net capital gain dividends. 43 COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO EMERGING COUNTRY DEBT FUND CLASS III SHARES AND THE J.P. MORGAN EMERGING MARKETS BOND INDEX GLOBAL AS OF FEBRUARY 29, 2000
Average Annual Total Returns Class III Inception 4/19/1994 1yr 5yr 10yr (ITD) 45.71 27.76 20.67 Class IV Inception 1/09/98 1yr 5yr 10yr (ITD) 45.89 N/A 1.72
[GRAPH]
Date GMO Emerging Country Debt Fund-III J.P. Morgan EMBI Global* J.P. Morgan Emerging Markets Plus 4/19/1994 9950 10000 10000 6/30/1994 9741 9906 9906 9/30/1994 10587 10982 10982 12/31/1994 9535 10062 10062 3/31/1995 8770 8948 8948 6/30/1995 11065 10991 10991 9/30/1995 12128 11741 11741 12/31/1995 13835 12800 12800 3/31/1996 14753 13309 13309 6/30/1996 17312 14781 14781 9/30/1996 20528 16652 16652 12/31/1996 22926 17831 17832 3/31/1997 23817 17971 17971 6/30/1997 27308 19664 19664 9/30/1997 31393 21020 21020 12/31/1997 30034 20153 20153 3/31/1998 31800 21203 21203 6/30/1998 28322 19936 19936 9/30/1998 18435 15703 15703 12/31/1998 20864 17261 17261 3/31/1999 21759 18134 18134 6/30/1999 23072 19086 19086 9/30/1999 23372 19315 19315 12/31/1999 27600 21744 21744 2/29/2000 30116 22560 22687
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 50 bp on the purchase and 25 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Performance for Class IV shares may be different due to lower shareholder service fees. Past performance is not indicative of future performance. Information is unaudited. * J.P. Morgan EMBI Global represents the J.P. EMBI prior to 8/95, J.P. Morgan EMBI through 12/31/99 and the J.P. Morgan EMBI Global thereafter. The manager changed the benchmark due to the belief that the EMBIG is more diversified and representative of the universe of emerging country debt. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. Thomas F. Cooper and Mr. William L. Nemerever are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the Emerging Country Debt Fund returned 46.8% from March 1, 1999 to February 29, 2000, which compared favorably with the 33.8% benchmark return. Consistent with the Fund's investment objectives and policies, the Fund was substantially invested in sovereign debt instruments of emerging countries throughout the period. Sovereign spreads on the J.P. Morgan Emerging Markets Bond Index Plus (EMBI+) narrowed from 1330 basis points to 816 basis points. Emerging country debt markets weathered several events, including the decision by Ecuador to default on its Brady bond obligations in September 1999, political developments in Russia and concerns about Y2K. Russia, the worst performing country in 1998, returned 166% in 1999, and was the best performing country in the universe. Although Brazil devalued its currency in January 1999, its debt returned 41%, as the country's new economic team managed economic policy adroitly. The portfolio's overweight exposure to Ecuador was hedged using credit default swaps. These swaps protected the portfolio when Ecuador defaulted on its Brady bonds. Most of the value added by the Emerging Country Debt Fund relative to the Index occurred between October 1999 and February 2000. Underweight positions in Poland, Mexico, Panama and South Korea added value to the portfolio. Overweight positions in countries outside the Index, such as Algeria, Vietnam and Tunisia, also added value. In addition, security selection in Russia and Brazil contributed to the Fund's positive performance. The Fund remained fully invested throughout the period. The benchmark for this Fund was changed on January 1, 2000 from the J.P. Morgan Emerging Markets Bond Index Plus (EMBI+) to the J.P. Morgan Emerging Markets Bond Index Global (EMBIG). The EMBIG is a broader index with 26 countries, versus the 16 countries that are included in the EMBI+. The EMBIG offers additional exposure to Asia (15% versus 4%), and less to Latin America (67% versus 81%). The change in index is not expected to have a material effect on the management of this portfolio. OUTLOOK The Fund's strategy continues to emphasize issue selection with a preference for cheaper, long duration, less marketable issues that offer higher yields versus the new benchmark, the J.P. Morgan Emerging Markets Bond Index Global. The Fund is currently underweight in Ecuador, Mexico, Panama, Philippines, Poland, Russia, South Korea and Turkey. Our largest overweight positions (within the Index) are in Argentina, Bulgaria and Morocco. Jordan and Tunisia are the Fund's largest positions outside the benchmark universe. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 29, 2000 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Currency Hedged International Bond Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 18, 2000 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 92.7% ARGENTINA -- 0.3% USD 1,000,000 Republic of Argentina Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 6.88%, due 03/31/23 825,000 ----------- AUSTRALIA -- 0.6% AUD 2,620,000 Queensland Treasury Corp, 8.00%, due 09/14/07 1,705,756 ----------- AUSTRIA -- 2.8% GBP 4,500,000 Bank Austria AG Series EMTN, 8.38%, due 11/04/11 7,833,746 ----------- BRAZIL -- 1.9% USD 7,000,000 Brazil Discount ZL Bond, Variable Rate, 6 mo. LIBOR + .81%, 6.94%, due 04/15/24 5,468,750 ----------- BULGARIA -- 1.9% USD 10,000,000 Bulgaria Discount Series B Interest Strips, Basket 2, 0.00%, due 07/28/24 1,790,000 USD 15,000,000 Bulgaria Discount Strips, 0.00%, due 07/28/24(a) 2,947,838 USD 1,000,000 Bulgaria FLIRB Series B, Variable Rate, Step Up, 3.25%, due 07/28/12 750,000 ----------- 5,487,838 ----------- CANADA -- 8.7% CAD 3,750,000 Government of Canada, 10.25%, due 03/15/14 3,577,619 CAD 8,000,000 Government of Canada Real Return, 4.25%, due 12/01/21 6,496,926 CAD 5,000,000 Government of Canada Real Return, 4.25%, due 12/01/26 3,869,332 GBP 6,000,000 Province of Quebec, 8.62%, due 11/04/11 10,723,478 ----------- 24,667,355 ----------- CAYMAN ISLANDS -- 7.2% GBP 2,000,000 BA Credit Card Corp Series 97-1, 7.13%, due 09/15/02 3,143,507 GBP 3,000,000 Chester Asset Receivables, Inc., Deal 2, Variable Rate, 3 mo. GBP LIBOR + .10%, 6.11%, due 06/15/01 4,735,626 CAD 4,000,000 Government of Canada (Cayman), 7.25%, due 06/01/08 2,866,988 USD 3,723,077 Great Point CBO Ltd. Series 98-1A Class A1, 144A, Variable Rate, 6 mo. LIBOR + .30%, 6.39%, due 10/15/10 3,698,644
See accompanying notes to the financial statements. 1 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- CAYMAN ISLANDS -- CONTINUED USD 6,650,000 Pemex Finance Ltd. Series 1A1 Class A2, 144A, 6.30%, due 05/15/10 5,931,800 ----------- 20,376,565 ----------- CHILE -- 1.6% USD 4,750,000 Banco Santander, Series MBIA, 6.50%, due 11/01/05 4,434,125 ----------- DENMARK -- 0.5% DKK 9,680,000 Kingdom of Denmark Bullet, 8.00%, due 03/15/06 1,399,010 ----------- ECUADOR -- 0.1% USD 566,140 Republic of Ecuador PDI (Registered), PIK, Variable Rate, 6 mo. LIBOR + .81%, 6.75%, due 02/27/15* 137,289 ----------- FRANCE -- 2.7% FRF 21,000,000 Auxiliare Credit Foncier, 10.00%, due 04/20/01 3,271,592 FRF 30,000,000 Auxiliare Credit Foncier, 6.25%, due 03/28/03 4,498,009 ----------- 7,769,601 ----------- JAPAN -- 5.0% GBP 2,300,000 Export Import Bank of Japan, 10.75%, due 05/15/01 3,785,328 GBP 6,000,000 Kobe City, 9.50%, due 10/20/04 10,376,795 ----------- 14,162,123 ----------- JORDAN -- 0.2% USD 1,000,000 Hashemite Kingdom of Jordan Par Bond Series DEF, Variable Rate, Step Up, 144A, 6.00%, due 12/23/23 667,500 ----------- MEXICO -- 3.0% FRF 10,000,000 Mexico Par Bond, 6.63%, due 12/31/19 1,297,150 CHF 18,000,000 Mexico Par Bond, 3.75%, due 12/31/19 7,268,940 ----------- 8,566,090 ----------- NEW ZEALAND -- 1.0% NZD 6,200,000 New Zealand Index Linked Bond Series 216, 4.50%, due 02/15/16 2,910,463 -----------
See accompanying notes to the financial statements. 2 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- NIGERIA -- 0.3% USD 1,603,625 Central Bank of Nigeria Par Bond Odd Lot, Variable Rate, Step Up, 6.25%, due 11/15/20(a) 829,875 ----------- NORWAY -- 0.6% SEK 13,700,000 A/S Eksportfinans, 7.50%, due 08/16/01 1,603,777 ----------- SUPRA NATIONAL -- 3.1% AUD 16,100,000 European Bank for Reconstruction and Development, Zero Coupon, due 02/10/28 1,257,832 CAD 2,700,000 European Investment Bank, 8.50%, due 08/30/05 2,018,022 GBP 3,000,000 International Bank for Reconstruction and Development, 11.50%, due 11/09/03 5,446,515 ----------- 8,722,369 ----------- SWEDEN -- 1.9% SEK 35,000,000 Government of Sweden Index Linked Bond, 4.00%, due 12/01/20 4,036,957 SEK 5,700,000 Kingdom of Sweden, 8.00%, due 08/15/07 734,817 SEK 6,100,000 Kingdom of Sweden, 6.50%, due 10/25/06 722,718 ----------- 5,494,492 ----------- UNITED STATES -- 48.0% ASSET BACKED SECURITIES -- 37.3% USD 17,000,000 Aircraft Finance Trust Series 99-1A Class A1, Variable Rate, 1 mo. LIBOR + .48%, 6.36%, due 05/15/24 16,968,125 USD 4,000,000 American Express Credit Account Master Trust Series 98-1A, Variable Rate, 1 mo. LIBOR + .09%, 5.97%, due 01/17/06 3,993,906 USD 10,000,000 American Express Credit Account Master Trust Series 99-5 Class A, Variable Rate, 1 mo. LIBOR + .24%, 6.13%, due 02/15/07 10,031,250 USD 2,000,000 Augusta Funding Ltd. X, 144A, Variable Rate, 3mo. LIBOR + .25%, 6.43%, due 06/30/17 1,938,438 USD 7,500,000 BEA CBO Series 98-1A Class A2A, 144A, 6.72%, due 06/15/10 6,776,953 USD 5,000,000 Chyps CBO Series 97-1A Class A2A, 144A, 6.72%, due 01/15/10 4,595,313 USD 7,000,000 Discover Card Master Trust I Series 00-1 Class A, Variable Rate, 1 mo. LIBOR + .17%, 6.06%, due 08/16/07 6,998,359 USD 6,500,000 Discover Card Master Trust I Series 94-2 Class A, Variable Rate, 1 mo. LIBOR + .35%, 6.24%, due 10/16/04 6,521,582 USD 3,500,000 Fleet Credit Card Master Trust II Series 00-A Class A, Variable Rate, 1 mo. LIBOR + .13%, 6.05%, due 07/15/05 3,499,453
See accompanying notes to the financial statements. 3 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- ASSET BACKED SECURITIES -- CONTINUED USD 5,000,000 Honda Auto Lease Trust Series 99-A Class A4, 6.45%, due 09/16/02 4,957,422 USD 5,000,000 MBNA Master Credit Card Trust Series 95-G Class A, Variable Rate, 1 mo. LIBOR + .21%, 6.10%, due 10/15/02 5,007,422 USD 5,000,000 Navistar Financial Dealer Note Master Trust Series 97-1 Class A, Variable Rate, 1 mo. LIBOR + .15%, 5.96%, due 08/25/03 4,993,555 USD 3,000,000 NPF VI, Inc. Series 99-1 Class A, 144A, 6.25%, due 02/01/03 2,919,000 USD 5,500,000 NPF XII, Inc. Series 99-2 Class A, 144A, 7.05%, due 06/01/03 5,431,250 USD 5,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A, Variable Rate, Step Up, 6.33%, due 09/15/09 4,921,875 USD 10,000,000 SHYPPCO Finance Company Series B Class A-2B, 6.64%, due 06/15/10 9,125,000 USD 5,000,000 Student Loan Marketing Association Series 96-4 Class A2, Variable Rate, 3 mo. U.S. Treasury Bill + .64%, 5.95%, due 07/25/09 4,932,813 USD 2,000,000 Team Fleet Financing Corp Series 98-3A Class A, 144A, 6.13%, due 10/25/04 1,917,500 ----------- 105,529,216 ----------- CORPORATE DEBT -- 4.9% USD 9,738,885 Continental Airlines Series 99-1A, 6.55%, due 02/02/19 8,716,302 SEK 44,000,000 Toyota Motor Credit, 7.50%, due 08/06/01 5,152,823 ----------- 13,869,125 ----------- U.S. GOVERNMENT -- 1.7% USD 10,100,000 U.S. Treasury 0.00% Receipts, due 02/15/14(a) 3,827,058 USD 1,026,220 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09(b) 993,509 ----------- 4,820,567 ----------- U.S. GOVERNMENT AGENCY -- 4.1% USD 5,000,000 Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10%, 6.15%, due 02/01/27 4,900,000 USD 2,000,000 Agency for International Development Floater (Support of Zimbabwe), Variable Rate, 3 mo. U.S. Treasury Bill X 115%, 5.83%, due 01/01/12 1,920,000
4 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY -- CONTINUED USD 5,000,000 Federal Home Loan Bank, Variable Rate, CPI + 3.15%, 5.66%, due 02/15/02(b) 4,865,450 ----------- 11,685,450 ----------- TOTAL UNITED STATES 135,904,358 ----------- VENEZUELA -- 1.3% USD 500,000 Republic of Venezuela, 9.25%, due 09/15/27 337,500 USD 2,152,155 Republic of Venezuela DCB IL, Variable Rate, 6 mo. LIBOR + .88%, 7.00%, due 12/18/08 1,737,865 USD 2,000,000 Republic of Venezuela Discount Bond Series A, Variable Rate, 6 mo. LIBOR + .81%, 7.00%, due 03/31/20 1,545,000 ----------- 3,620,365 ----------- TOTAL DEBT OBLIGATIONS (COST $276,255,215) 262,586,447 ----------- LOAN ASSIGNMENTS -- 1.3% RUSSIA -- 1.3% USD 15,750,278 Russia Vnesh Restructured Loan Agreements* 3,721,003 ----------- TOTAL LOAN ASSIGNMENTS (COST $10,049,552) 3,721,003 ----------- SHARES ---------- MUTUAL FUND -- 2.3% 253,836 GMO Alpha Libor Fund 6,419,520 ----------- TOTAL MUTUAL FUND (COST $6,407,494) 6,419,520 ----------- PRINCIPAL AMOUNT ---------- CALL OPTIONS PURCHASED -- 0.0% OPTIONS ON CURRENCY -- 0.0% USD 22,176,000 Euro, Expires 5/03/00, Strike 1.12 4,435 -----------
See accompanying notes to the financial statements. 5 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PRINCIPAL AMOUNT DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- OPTIONS ON FUTURES -- 0.0% USD 1,582,500 Eurodollar, Expires 3/13/00, Strike 93.75 87,038 ----------- TOTAL CALL OPTIONS PURCHASED (COST $536,720) 91,473 ----------- PUT OPTIONS PURCHASED -- 0.7% CROSS CURRENCY OPTIONS -- 0.0% EUR 40,200,000 Euro Put/Swiss Franc Call, Expires 6/05/00, Strike 1.58485 58,057 ----------- OPTIONS ON CURRENCY -- 0.7% USD 21,186,000 Euro, Expires 5/03/00, Strike 1.07 1,870,724 ----------- TOTAL PUT OPTIONS PURCHASED (COST $901,171) 1,928,781 ----------- SHARES ---------- RIGHTS AND WARRANTS -- 0.0% MEXICO -- 0.0% 13,746,000 United Mexican States Warrants, Expires 6/30/03** -- ----------- NIGERIA -- 0.0% 1,602 Central Bank of Nigeria Payment Adjusted Warrants, Expires 11/15/20** -- ----------- VENEZUELA -- 0.0% 14,280 Republic of Venezuela Recovery Warrants, Expires 4/15/20** -- ----------- TOTAL RIGHTS AND WARRANTS (COST $0) -- ----------- PAR VALUE ---------- SHORT-TERM INVESTMENTS -- 3.9% COMMERCIAL PAPER -- 3.8% USD 10,800,000 Koch Industries Inc., 5.83%, due 3/01/00 10,800,000 -----------
See accompanying notes to the financial statements. 6 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 0.1% USD 206,169 Salomon Smith Barney, Inc. Repurchase Agreement, dated 2/29/00, due 3/1/00, with a maturity value of $206,197 and an effective yield of 4.95%, collaterized by a U.S. Treasury Obligation with a rate of 8.125%, maturity date of 8/15/19 and market value, including accrued interest, of $210,292. 206,169 ----------- TOTAL SHORT-TERM INVESTMENTS (COST $11,006,169) 11,006,169 ----------- TOTAL INVESTMENTS -- 100.9% (Cost $305,156,321) 285,753,393 Other Assets and Liabilities (net) -- (0.9%) (2,413,727) ----------- TOTAL NET ASSETS -- 100.0% $283,339,666 ===========
See accompanying notes to the financial statements. 7 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000 NOTES TO SCHEDULE OF INVESTMENTS: 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. CBO - Collateralized Bond Obligation EMTN - Euromarket Medium Term Note FLIRB - Front Loaded Interest Reduction Bond PDI - Past Due Interest PIK - Payment In Kind Variable and Step up rates - The rates shown on variable and step up rate notes are the current interest rates at February 29, 2000, which are subject to change based on the terms of the security, including varying reset dates. CURRENCY ABBREVIATIONS: AUD - Australian Dollar BEF - Belgian Franc CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krone EUR - Euro FRF - French Franc GBP - British Pound ITL - Italian Lira JPY - Japanese Yen NZD - New Zealand Dollars SEK - Swedish Krona USD - United States Dollar (a) Valued by management (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). * Non-performing. Borrower not currently paying interest. ** Non-income producing security. 8 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $305,156,321) (Note 1) $285,753,393 Cash at interest on deposit at brokers (Note 1) 2,652,354 Receivable for investments sold 4,000,000 Interest receivable 4,241,859 Net receivable for open forward foreign currency contracts (Notes 1 and 6) 1,361,110 Receivable for expenses waived or borne by Manager (Note 2) 9,906 ------------ Total assets 298,018,622 ------------ LIABILITIES: Payable for Fund shares repurchased 13,535,000 Payable to affiliate for (Note 2): Management fee 58,885 Shareholder service fee 35,248 Interest payable for open swap contracts (Notes 1 and 6) 668,191 Payable for open swap contracts (Notes 1 and 6) 227,410 Payable for variation margin on open futures contracts (Notes 1 and 6) 81,443 Accrued expenses 72,779 ------------ Total liabilities 14,678,956 ------------ NET ASSETS $283,339,666 ============ NET ASSETS CONSIST OF: Paid-in capital $291,897,319 Accumulated undistributed net investment income 7,564,367 Accumulated net realized gain 2,954,477 Net unrealized depreciation (19,076,497) ------------ $283,339,666 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $283,339,666 ============ SHARES OUTSTANDING: Class III 29,210,729 ============ NET ASSET VALUE PER SHARE: Class III $ 9.70 ============
See accompanying notes to the financial statements. 9 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest (including securities lending income of $1,163) $21,283,097 Dividends 331,750 ----------- Total income 21,614,847 ----------- EXPENSES: Management fee (Note 2) 781,487 Custodian and transfer agent fees 161,967 Audit fees 58,438 Legal fees 7,643 Trustees fees (Note 2) 3,482 Registration fees 2,955 Miscellaneous 4,099 Fees waived or borne by Manager (Note 2) (238,584) ----------- 781,487 Shareholder service fee (Note 2) Class III 468,892 ----------- Net expenses 1,250,379 ----------- Net investment income 20,364,468 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (3,454,151) Closed futures contracts 1,249,203 Closed swap contracts (932,555) Written options 645,000 Foreign currency, forward contracts and foreign currency related transactions 4,863,325 ----------- Net realized gain 2,370,822 ----------- Change in net unrealized appreciation (depreciation) on: Investments (9,136,906) Open futures contracts 239,705 Open swap contracts 1,815,479 Written options (156,864) Foreign currency, forward contracts and foreign currency related transactions 1,051,356 ----------- Net unrealized loss (6,187,230) ----------- Net realized and unrealized loss (3,816,408) ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $16,548,060 ===========
10 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 20,364,468 $ 24,198,721 Net realized gain 2,370,822 7,292,715 Change in net unrealized appreciation (depreciation) (6,187,230) (20,892,066) ------------ ------------ Net increase in net assets from operations 16,548,060 10,599,370 ------------ ------------ Distributions to shareholders from: Net investment income Class III (32,068,429) (6,307,979) ------------ ------------ Total distributions from net investment income (32,068,429) (6,307,979) ------------ ------------ Net realized gains Class III (3,809,147) (14,428,617) ------------ ------------ Total distributions from net realized gains (3,809,147) (14,428,617) ------------ ------------ (35,877,576) (20,736,596) ------------ ------------ Net share transactions: (Note 5) Class III (21,042,118) 12,943,319 ------------ ------------ Increase (decrease) in net assets resulting from net share transactions (21,042,118) 12,943,319 ------------ ------------ Total increase (decrease) in net assets (40,371,634) 2,806,093 NET ASSETS: Beginning of period 323,711,300 320,905,207 ------------ ------------ End of period (including accumulated undistributed net investment income of $7,564,367 and $19,566,701, respectively) $283,339,666 $323,711,300 ============ ============
See accompanying notes to the financial statements. 11 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.47 $ 10.66 $ 12.16 $ 10.92 $ 9.99 -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.65+ 0.74 0.88 0.66 1.05 Net realized and unrealized gain (loss) (.0.17) (0.39) 0.73 2.07 1.62 -------- -------- -------- -------- -------- Total from investment operations 0.48 0.35 1.61 2.73 2.67 -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (1.11) (0.16) (0.88) (0.60) (1.04) From net realized gains (0.14) (0.38) (2.23) (0.45) (0.42) In excess of net investment income -- -- -- (0.44) (0.28) -------- -------- -------- -------- -------- Total distributions (1.25) (0.54) (3.11) (1.49) (1.74) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.70 $ 10.47 $ 10.66 $ 12.16 $ 10.92 ======== ======== ======== ======== ======== TOTAL RETURN(a) 4.95% 3.20% 14.44% 25.57% 27.36% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $283,340 $323,711 $320,905 $468,979 $236,162 Net expenses to average daily net assets 0.40% 0.40% 0.40% 0.40% 0.40% Net investment income to average daily net assets 6.51% 6.30% 6.50% 6.86% 8.54% Portfolio turnover rate 65% 116% 135% 90% 85% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.04 $ 0.05 $ 0.03 $ 0.03
(a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. + Computed using average shares outstanding throughout the period. 12 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Currency Hedged International Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in foreign bond and currency markets. The Fund's benchmark is the J.P. Morgan Non-U.S. Government Bond Index (Hedged). The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Shares of other Funds of the Trust are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. Some fixed income securities and options thereon are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). 13 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Securities may be valued by independent pricing services which use prices provided by market-makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. At February 29, 2000, the total value of these securities represented 17% of net assets. Included in this total are U.S. Government backed securities and highly rated collateralized debt obligations that represent 14% of net assets at February 29, 2000. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FUTURES CONTRACTS The Fund may use futures contracts to manage its exposure to the bond and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract 14 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 29, 2000. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. See Note 6 for all open written option contracts as of February 29, 2000. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's 15 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. The risk associated with purchasing put and call options is limited to the premium paid. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the lender) that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. Direct indebtedness of emerging countries involves a risk that the governmental entities responsible for the repayment of the debt may be unable or unwilling to pay the principal and interest when due. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market-linked return, both based on notional 16 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Credit default swaps involve the payment of a specified rate based on the notional amount. The Fund receives payment upon a default of the underlying security. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral, which is paid by the counterparty. At February 29, 2000, $2,652,354 in cash has been set aside. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform and that there may be unfavorable changes in the fluctuation of interest rates. See Note 6 for a summary of open swap agreements as of February 29, 2000. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements 17 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- involve the risk that the market value of the securities the Fund has sold may decline below the contractual repurchase price under the agreement. For the year ending, February 29, 2000, the Fund had not entered into a reverse repurchase agreement. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund had no securities on loan. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to the differing treatments for foreign currency transactions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable 18 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $(298,373) $1,047,524 $(749,151)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis, and is adjusted for the accretion of discounts. Dividend income is recorded on the ex-dividend date. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .15% of the amount invested. The premium will be reduced by 50% with respect to any portion of a purchase that is offset by a corresponding redemption occurring on the same day. In addition, the purchase premium for the Fund will be reduced by 50% if the purchaser makes an in-kind purchase of Fund shares or if the purchase or redemption is part of a transfer from or to another Fund where the Manager is able to transfer securities among the Funds to effect the transaction. All purchase premiums are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $111,899 in purchase premiums. There is no premium for redemptions or reinvested distributions. 19 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .50% average of daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses) exceeded .25% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000, was $3,482. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 20 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 3. PURCHASES AND SALES OF SECURITIES For the year ended February 29, 2000, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Sales ------------ ------------ U.S. Government securities $ 2,004,682 $ 2,008,492 Investments (non-U.S. Government securities) 188,349,188 203,117,990
At February 29, 2000, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $305,308,324 $4,467,701 $(24,042,632) $(19,574,931)
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 91.0% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders could have a material effect. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 -------------------------- -------------------------- Shares Amount Shares Amount Class III: ----------- ------------- ----------- ------------- Shares sold 7,145,457 $ 74,727,562 12,392,112 $ 135,897,894 Shares issued to shareholders in reinvestment of distributions 3,607,085 34,924,563 1,908,812 20,116,214 Shares repurchased (12,460,892) (130,694,243) (13,476,925) (143,070,789) ----------- ------------- ----------- ------------- Net increase (decrease) (1,708,350) $ (21,042,118) 823,999 $ 12,943,319 =========== ============= =========== =============
21 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- --------------------------------------------- ----------------- ------------ -------------- Buys 3/10/00 CAD 18,700,000 $12,890,891 $ 174,128 3/23/00 EUR 23,900,000 23,049,399 (825,938) 3/03/00 GBP 53,800,000 84,933,038 (888,813) 4/21/00 JPY 90,000,000 826,718 3,328 ----------- $(1,537,295) =========== Sales 4/28/00 AUD 15,700,000 $ 9,649,267 $ 183,250 3/10/00 CAD 7,200,000 4,963,338 8,599 3/23/00 EUR 32,400,000 31,246,885 1,500,539 3/03/00 GBP 53,800,000 84,933,038 1,150,679 5/05/00 GBP 35,100,000 55,406,544 28,466 4/21/00 JPY 1,420,000,000 13,043,778 154,720 3/30/00 NZD 6,300,000 3,060,162 142,632 ----------- $ 3,168,885 ===========
FORWARD CROSS CURRENCY CONTRACTS
Settlement Date Deliver/Units of Currency Receive/In Exchange For ---------- ------------------------------------------------------ ----------------------------------------------------- 4/14/00 CHF 35,788,713 EUR 22,300,000 4/14/00 EUR 5,700,000 CHF 9,142,629 4/07/00 SEK 146,664,135 EUR 17,100,000 Net Unrealized Settlement Appreciation Date (Depreciation) ---------- -------------- 4/14/00 (14,519) 4/14/00 605 4/07/00 (256,566) --------- $(270,480) =========
22 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- --------------------------------------------- ------------------ ------------- -------------- Buys 43 Australian Government Bond 10 Yr. March 2000 $ 3,657,683 $ 100,454 54 Australian Government Bond 3 Yr. March 2000 3,809,633 (19,923) 726 Euro Bund 10 Yr. March 2000 72,499,346 (1,041,068) 37 Japanese Government Bond 10 Yr. March 2000 44,499,021 339,312 29 Japanese Government Bond 10 Yr. June 2000 34,534,432 (5,497) 99 Swiss Government Bond 10 Yr. March 2000 7,019,719 (131,782) 133 U.S. Long Bond June 2000 12,593,437 72,909 513 U.S. Treasury Note 10 Yr. June 2000 48,935,391 100,869 47 U.S. Treasury Note 5 Yr. June 2000 4,563,406 (35,459) ----------- $ (620,185) =========== Sales 52 Canadian Government Bond 10 Yr. June 2000 $ 3,529,263 $ (5,480) 37 Japanese Government Bond 10 Yr. March 2000 44,512,494 13,195 133 U.K. Gilt June 2000 23,451,320 132,115 ----------- $ 139,830 ===========
At February 29, 2000, the Fund has sufficient cash and/or securities to cover any margin requirements on open futures contracts. 23 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- WRITTEN OPTION TRANSACTIONS
Puts Calls Principal Amount Principal Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ---------------- ------------- ---------------- ------------- Outstanding, beginning of period 8,600 $ 541,284 8,600 $ 645,000 Options written -- -- -- -- Options closed -- -- -- -- Options exercised (8,600) (541,284) -- -- Options expired -- -- (8,600) (645,000) ------- --------- ------- --------- Outstanding, end of period -- $ -- -- $ -- ======= ========= ======= =========
SWAP AGREEMENTS
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- CREDIT DEFAULT SWAPS 288,000,000,000 ITL 3/31/03 Agreement with Morgan Guaranty Trust Company dated $ (157,270) 3/26/98 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Italy, the notional amount times the difference between the par value and the then-market value of Italy BTP, 6.00% due 11/01/07. 6,036,000,000 BEF 3/31/03 Agreement with Morgan Guaranty Trust Company dated (186,140) 3/26/98 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Belgium, the notional amount times the difference between the par value and the then-market value of Kingdom of Belgium, 5.75% due 3/28/08.
24 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- INTEREST RATE SWAPS 27,300,000 CHF 6/05/05 Agreement with Morgan Guaranty Trust Company dated $ 422,307 6/03/98 to pay the notional amount multiplied by 3.245% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 23,700,000 CHF 6/10/05 Agreement with Credit Suisse Financial Products 361,614 dated 6/08/98 to pay the notional amount multiplied by 3.2625% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 14,200,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust Company dated 224,270 6/09/98 to pay the notional amount multiplied by 3.245% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 10,700,000 CHF 9/16/05 Agreement with Morgan Guaranty Trust Company dated 387,466 9/14/98 to pay the notional amount multiplied by 3.1175% and to receive the notional amount multiplied by 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 35,000,000 USD 7/29/06 Agreement with Morgan Guaranty Trust Company dated (1,241,277) 7/27/99 to receive the notional amount multiplied by 6.664% and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread.
25 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 62,000,000 SEK 9/13/06 Agreement with UBS AG dated 9/09/99 to receive the 28,724 notional amount multiplied by 6.465% and to pay the notional amount multiplied by 3 month Floating Rate Swedish LIBOR adjusted by a specified spread. TOTAL RETURN SWAP 75,000,000 USD 7/25/01 Agreement with Morgan Guaranty Trust Company dated (67,104) 7/01/99 to receive (pay) the notional amount multiplied by the return on the JP Morgan Non-U.S. Traded Total Return Government Bond Index and to pay the notional amount multiplied by 1 month LIBOR adjusted by a specified spread.+ ----------- $ (227,410) ===========
See Notes to the Schedule of Investments for definitions of currency abbreviations. + This swap agreement is valued by management (Note 1). 26 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 10.6% of the distributions as net capital gain dividends. 27 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the Currency Hedged International Bond Fund returned 5.0% for the fiscal year ended February 29, 2000, compared to 2.6% for the J.P. Morgan Non-U.S. Government Bond Index (Hedged). Consistent with the Fund's investment objectives and policies, the Fund was substantially invested in investment-grade, foreign and domestic fixed income instruments throughout the period. The Fund outperformed the benchmark during the fiscal year by 2.4%. Currency and emerging country debt selection added value during the fiscal year, while bond market and issue selection were negative and reduced portfolio return. Long bond yields increased by 20 to 200 basis points in developed countries, except in Japan where yields declined by 60 basis points. Other than in Japan, bond market returns were negative across the international bond universe. The U.S. dollar appreciated against European currencies, but declined against the Japanese yen, Canadian dollar and Australian dollar. Bond market selection during the fiscal year was hurt by an underweight position in Japanese bonds and an overweight position in Swedish bonds. These losses were offset to some extent by an underweight position in Swiss bonds. Currency selection added modest value during the fiscal year. Overweight positions in Canadian dollars and British pounds added more than 150 basis points in value, but were offset to some extent by losses on underweight positions in U.S. and Australian dollars and an overweight position in Euros. Emerging country debt exposure added more than 250 basis points during the fiscal year, with much of it concentrated in the second half of the period year. Sovereign spreads on the J.P. Morgan Emerging Markets Bond Index Plus declined from 1330 basis points to end the fiscal year at 816 basis points. Issue selection was neutral during the fiscal year despite rising short-term interest rates and concerns about Y2K. OUTLOOK The Fund is structured to benefit from outperformance in the Australian, Canadian, European, New Zealand, Swedish, U.S. and emerging bond markets. We expect the Danish, Japanese, Swiss and British bond markets to underperform. Our strategy maintains a market duration in each country. Strong relative performance is expected from Canadian dollars, Euros and Swiss francs. The Australian dollar, Danish krone, Japanese yen, Swedish krona, British pound and U.S. dollar are expected to underperform. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO CURRENCY HEDGED INTERNATIONAL BOND FUND CLASS III SHARES AND THE J.P. MORGAN NON-U.S. GOVERNMENT BOND INDEX (HEDGED) AS OF FEBRUARY 29, 2000
Average Annual Returns Inception 9/30/94 1yr 5yr 10yr (ITD) 4.79 14.61 13.74
[GRAPH]
GMO Currency Hedged International Bond Fund-III As of 2/29/00 Date GMO Currency Hedged International Bond Fund-III JP Morgan Non-US Gov't Bond Hedged 9/30/94 9,985 10,000 12/31/94 9,961 10,162 3/31/95 10,265 10,625 6/30/95 11,138 11,126 9/30/95 11,933 11,548 12/31/95 12,729 12,045 3/31/96 13,024 12,149 6/30/96 13,934 12,482 9/30/96 14,819 13,014 12/31/96 15,766 13,524 3/31/97 16,019 13,694 6/30/97 16,699 14,151 9/30/97 17,782 14,651 12/31/97 18,251 15,046 3/31/98 18,895 15,516 6/30/98 19,051 15,872 9/30/98 19,284 16,721 12/31/98 19,286 16,872 3/31/99 19,488 17,169 6/30/99 19,396 17,044 9/30/99 19,328 17,091 12/31/99 19,798 17,281 2/29/00 20,088 17,404
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 15 bp on the purchase. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of GMO Trust and the Shareholders of GMO Asia Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Asia Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 13, 2000 GMO ASIA FUND (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 29, 2000
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------------------------- COMMON STOCKS - 95.5% CHINA - 18.4% 2,589,000 Beijing Datang Power Generation Co Ltd Class H 312,697 1,044,000 China Merchants Holdings Co Ltd 647,235 6,433,000 China Overseas Land & Investment Ltd * 843,098 975,000 China Resources Enterprise 1,259,026 1,624,800 China Telecom Ltd * 14,979,108 1,127,000 Cosco Pacific Ltd 644,389 3,310,000 Guangdong Investment Ltd * 446,562 4,885,000 Guangshen Railway Co Class H 502,133 10,000 Huaneng Power International ADR 71,875 1,854,000 Huaneng Power International Inc Class H 321,594 2,754,000 Qingling Motor Co Ltd Class H 293,702 279,474 Shanghai Chlor-Alkali Chemical Class B * 30,183 430,000 Shanghai Industrial Holdings 809,413 4,256,000 Shanghai Petrochemical Co Class H 437,478 4,166 SIIC Medical Science and Technology (Group) Ltd * 985 1,734,000 Yizheng Chemical Fibre Co Class H * 274,043 ----------------- 21,873,521 ----------------- INDONESIA - 16.1% 4,009,000 Astra International * 1,984,253 59,000,000 Bank Internasional Indonesia * 794,613 8,231,000 Barito Pacific Timber * 581,990 5,308,000 Citra Marga Nusaphala Persad * 554,034 3,840,000 Gajah Tunggal Tbk * 439,596 2,523,000 Gudang Garam 4,205,000 50,820 Gulf Resources Ltd ADR * 355,740 984,000 HM Sampoerna * 1,626,747 5,008,500 Indah Kiat Pulp & Paper * 1,382,818 2,387,000 Indorama Synthetics * 369,704 874,500 International Nickel * 871,556 4,693,000 Kalbe Farma * 616,253 5,803,000 Matahari Putra Prima Tbk * 781,549 1,535,500 PT Bimantara Citra * 392,923 1,450,000 PT Hero Supermarket Tbk * 380,808 1,869,000 PT Indofood Sukses Makmur Tbk * 1,548,061 20,000 PT Indosat (Persero) Tbk Class B ADR 358,750 2,800,000 PT Multipolar Corp Tbk * 414,815 1,387,000 PT Pabrik Kertas Tjiwi Kimia * 326,902 298,000 Semen Gresik 337,131 93,200 Telekomunikasi Indonesia Class B ADR 902,875 ----------------- 19,226,118 -----------------
See accompanying notes to the financial statements. 1 GMO ASIA FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------------------------- KOREA - 7.9% 10,336 Cheil Jedang Corp 666,158 104,610 Hanwha Corp 416,182 2,320 Housing & Commercial Bank 41,330 23,150 Hyundai Cement Co 110,520 26,850 Hyundai Electronics Industries * 424,908 22,638 Hyundai Heavy Industries 630,443 37,800 Hyundai Merchant Marine 260,665 91,200 Inchon Oil Refinery * 266,076 36,928 ISU Chemical Co 336,272 10,790 Keum Kang Ltd 496,046 39,783 Kookmin Bank 443,165 7,800 Korea Chemical 486,162 7,500 Korea Telecommunications ADR 326,250 43,735 Korean Air Lines 299,659 5,100 Pohang Iron & Steel (a) 525,362 17,500 Pohang Iron & Steel ADR 439,688 63,300 Poongsan Corp 346,970 29,500 Shin Young Securities Co 492,925 13,782 SK Corp 310,706 22,200 SK Telecom ADR 997,613 78,193 Ssangyong Motor Co * 253,948 30,020 Ssangyong Oil Refining 501,614 30,152 Tai Han Electric Wire 370,534 ----------------- 9,443,196 ----------------- MALAYSIA - 21.4% 674,000 Affin Holdings Berhad 695,284 193,800 APM Automotive Holdings Berhad * 142,800 563,000 Asiatic Development Berhad 201,495 232,000 Berjaya Sports Toto 589,158 67,600 British American Tobacco 498,105 248,000 Commerce Asset Holdings 776,632 310,000 Edaran Otomobil Berhad 1,305,257 235,000 Genting Berhad 1,038,947 699,000 Golden Hope Plantations Berhad 621,742 884,000 Hicom Holdings Berhad 786,295 311,000 Hong Leong Credit Berhad 671,105 601,000 IJM Corp Berhad Class A 673,753 836,000 Magnum Corp Berhad 734,800 394,000 Malakoff Berhad 1,067,947
2 See accompanying notes to the financial statements. GMO ASIA FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------------------------- MALAYSIA - CONTINUED 510,900 Malayan Banking Berhad 2,299,050 1,184,000 Malaysian International Shipping (Foreign Registered) 1,791,579 865,000 Malaysian Oxygen Berhad 2,708,816 2,172,000 Metroplex Berhad 617,305 505,400 Nylex Berhad 392,350 340,000 Oriental Holdings Berhad 800,789 401,500 Resorts World Berhad 1,458,079 760,000 RHB Capital Berhad 1,210,000 8,594,000 Tan Chong International Ltd 1,302,991 1,292,000 Tan Chong Motor Holdings Berhad 608,600 445,000 Tanjong 1,118,355 459,000 United Engineers * 1,268,289 64,600 Warisan TC Holdings Berhad * 39,100 ----------------- 25,418,623 ----------------- PHILIPPINES - 6.7% 8,359,570 Aboitiz Equity Ventures Inc 399,823 4,745,547 Ayala Corp 1,019,054 208,495 Equitable Banking Corp 284,913 271,000 Far East Bank & Trust 419,924 3,430,000 Filinvest Land * 217,618 6,054,500 International Container Terminal * 262,982 886,319 Ionics Circuits Inc * 281,165 4,020,500 JG Summit Holdings Inc Class B 294,327 889,200 La Tondena Distillers Inc 444,817 5,654,000 Petron Corp 336,646 133,870 Philippine Long Distance Telephone 2,907,377 260,000 RFM Corp 20,303 394,350 San Miguel Corp Class B 461,903 2,722,000 SM Prime Holdings 365,325 1,871,000 Universal Robina Corp 305,898 ----------------- 8,022,075 ----------------- SINGAPORE - 3.6% 148,000 DBS Group Holdings Ltd 1,828,857 273,000 Oversea-Chinese Banking Corp 1,726,344 174,405 Overseas Union Bank 774,032 ----------------- 4,329,233 ----------------- TAIWAN - 3.9% 6,800 GigaMedia Ltd * 476,425 898,000 Legend Holdings Ltd * 4,153,775 ----------------- 4,630,200 -----------------
See accompanying notes to the financial statements. 3 GMO ASIA FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
SHARES/ PAR VALUES($) DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------------------------- THAILAND - 17.5% 188,300 Advanced Info Service Public Co Ltd (Foreign Registered) * 2,924,665 994,700 Ban Pu Coal Public Co Ltd (Foreign Registered) 515,422 1,037,600 Bangkok Bank Pcl (Foreign Registered) * 1,674,207 2,327,000 Bangkok Expressway Public Co Ltd (Foreign Registered) * 641,047 41,100 Bangkok Insurance (Foreign Registered) 128,320 2,194,400 Bank of Ayudhya Pcl (Foreign Registered) * 564,217 688,320 CP Feedmill Public Co Ltd (Foreign Registered) * 2,492,146 62,932 Delta Electronics Public Co Ltd (Foreign Registered) 723,186 598,500 Electricity Generating Public Co Ltd (Foreign Registered) 537,810 1,813,500 Industrial Finance Corp of Thailand (Foreign Registered) * 511,482 81,000 PTT Exploration and Production Public Co Ltd (Foreign Registered) * 393,152 200,352 Shinawatra Computer Public Co Ltd (Foreign Registered) * 1,587,467 32,200 Siam Cement Pcl (Foreign Registered) * 581,230 923,900 Siam Commercial Bank Pcl (Foreign Registered) * 739,314 1,522,100 Telecomasia Corp Public Co Ltd (Foreign Registered) * 2,116,524 896,800 Thai Farmers Bank Pcl (Foreign Registered) * 847,037 2,305,000 Thai Military Bank (Foreign Registered) * 580,559 1,389,000 Thai Petrochemical (Foreign Registered) * 364,423 1,316,500 Thai Telephone & Telecommunications (Foreign Registered) * 354,037 1,054,030 United Broadcasting Pcl (Foreign Registered) * 926,407 1,346,700 United Communication Industries (Foreign Registered) * 1,687,129 ----------------- 20,889,781 ----------------- TOTAL COMMON STOCKS (Cost $108,743,031) 113,832,747 ----------------- DEBT OBLIGATIONS - 3.8% CHINA - 0.0% $ 100,000 Qingling Motor Co Ltd, 3.50% due 1/22/02 26,500 ----------------- U.S. GOVERNMENT - 3.8% $ 3,893,183 U.S. Treasury Inflation Indexed Note, 3.375% due 1/15/07 3,682,710 $ 820,976 U.S. Treasury Inflation Indexed Note, 3.875% due 1/15/09 794,807 ----------------- 4,477,517 ----------------- TOTAL DEBT OBLIGATIONS (Cost $4,656,343) 4,504,017 -----------------
4 See accompanying notes to the financial statements. GMO ASIA FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
SHARES/ PAR VALUES($) DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------------------------- PREFERRED STOCKS - 1.6% KOREA - 1.6% 19,500 Samsung Electronics (Non Voting) 1,775,697 4,559 Shinsegae Department Store * 157,192 ----------------- 1,932,889 ----------------- TOTAL PREFERRED STOCKS (Cost $518,259) 1,932,889 ----------------- RIGHTS & WARRANTS - 0.0% INDONESIA - 0.0% 420,000 PT Multipolar Corp Tbk Warrants 12/25/49 * - ----------------- THAILAND - 0.0% 247,600 Banpu Public Co Warrants 1/14/03 * - ----------------- TOTAL RIGHTS & WARRANTS (Cost $0) - ----------------- SHORT-TERM INVESTMENTS - 5.5% CASH EQUIVALENTS - 5.5% $ 6,600,000 Royal Bank of Canada Time Deposit, 5.81% due 3/01/00 6,600,000 ----------------- TOTAL SHORT-TERM INVESTMENTS (Cost $6,600,000) 6,600,000 ----------------- TOTAL INVESTMENTS - 106.4% (Cost $120,517,633) 126,869,653 Other Assets and Liabilities (net) - (6.4%) (7,651,604) ----------------- TOTAL NET ASSETS - 100.0% $ 119,218,049 ----------------- -----------------
NOTES TO THE SCHEDULE OF INVESTMENTS: ADR American Depositary Receipt (a) Valued by management (Note 1). * Non-income producing security. See accompanying notes to the financial statements. 5 GMO ASIA FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 - ------------------------------------------------------------------------------ At February 29, 2000, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR (UNAUDITED) Telecommunications 24.5 % Banking 12.2 Electronic Equipment 6.8 Food and Beverage 6.3 Consumer Goods 5.3 Financial Services 4.3 Real Estate 4.1 Automotive 3.9 Chemicals 3.6 Services 3.2 Transportation 3.1 Construction 2.9 Paper and Allied Products 2.8 Conglomerates 2.4 Energy Services 1.9 Health Care 1.7 Utilities 1.3 Machinery 1.2 Metals and Mining 1.1 Communications 0.8 Retail Trade 0.7 Textiles 0.5 Computers 0.4 Insurance 0.1 Miscellaneous 4.9 ------------- 100.0 % ------------- -------------
6 See accompanying notes to the financial statements. GMO ASIA FUND (A Series of GMO Trust)
Statement of Assets and Liabilities - February 29, 2000 - ---------------------------------------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $120,517,633) (Note 1) $ 126,869,653 Foreign currency, at value (cost $837,401) (Note 1) 834,379 Cash 3,182 Receivable for investments sold 6,610 Dividends and interest receivable 382,201 Receivable for expenses waived or borne by Manager (Note 2) 7,853 ------------------- Total assets 128,103,878 ------------------- LIABILITIES: Payable for Fund shares repurchased 7,981,000 Payable for open swap contracts (Notes 1 and 6) 621,410 Accrued capital gain and repatriation taxes payable (Note 1) 91,443 Payable to affiliate for (Note 2): Management fee 86,728 Shareholder service fee 16,061 Accrued expenses 89,187 ------------------- Total liabilities 8,885,829 ------------------- NET ASSETS $ 119,218,049 ------------------- ------------------- NET ASSETS CONSIST OF: Paid-in capital $ 101,407,413 Accumulated undistributed net investment income 73,119 Accumulated undistributed net realized gain 12,104,026 Net unrealized appreciation 5,633,491 ------------------- $ 119,218,049 ------------------- ------------------- NET ASSETS ATTRIBUTABLE TO CLASS III SHARES $ 119,218,049 ------------------- ------------------- SHARES OUTSTANDING - CLASS III 9,650,804 ------------------- ------------------- NET ASSET VALUE PER SHARE - CLASS III $ 12.35 ------------------- -------------------
See accompanying notes to the financial statements. 7 GMO ASIA FUND (A Series of GMO Trust)
Statement of Operations - Year Ended February 29, 2000 - ------------------------------------------------------------------------------------------------------------------ INVESTMENT INCOME: Dividends (net of foreign tax expense of $203,954) $ 1,176,403 Interest 505,658 ------------------------ Total income 1,682,061 ------------------------ EXPENSES: Management fee (Note 2) 928,350 Custodian fees 334,489 Audit fees 46,355 Transfer agent fees 27,545 Legal fees 4,621 Registration fees 2,041 Trustees fees (Note 2) 1,355 Miscellaneous 2,281 Fees waived or borne by Manager (Note 2) (84,198) ------------------------ 1,262,839 Shareholder service fee - Class III (Note 2) 171,917 ------------------------ Net expenses 1,434,756 ------------------------ Net investment income 247,305 ------------------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 20,573,064 Closed swap contracts 5,973,435 Foreign currency, forward contracts and foreign currency related transactions (111,396) ------------------------ ------------------------ Net realized gain 26,435,103 ------------------------ Change in net unrealized appreciation (depreciation) on: Investments (Note 1) 22,866,545 Open swap contracts (2,184,028) Foreign currency, forward contracts and foreign currency related transactions (62,179) ------------------------ ------------------------ Net unrealized gain 20,620,338 ------------------------ Net realized and unrealized gain 47,055,441 ------------------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 47,302,746 ------------------------ ------------------------
8 See accompanying notes to the financial statements. GMO ASIA FUND (A Series of GMO Trust) Statement of Changes in Net Assets - --------------------------------------------------------------------------------
Year Ended Year Ended FEBRUARY 29, 2000 FEBRUARY 28, 1999 ------------------- ------------------ INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 247,305 $ 767,337 Net realized gain (loss) 26,435,103 (10,861,319) Change in net unrealized appreciation (depreciation) 20,620,338 (15,400,922) ------------------- ------------------ Net increase (decrease) in net assets resulting from operations 47,302,746 (25,494,904) ------------------- ------------------ Distributions to shareholders from: Net investment income - Class III (220,569) (877,511) In excess of net investment income - Class III - (673,683) Net realized gains - Class III (3,424,176) - ------------------- ------------------ (3,644,745) (1,551,194) ------------------- ------------------ Net share transactions - Class III (Note 5) (1,843,973) 64,289,234 ------------------- ------------------ Total increase in net assets 41,814,028 37,243,136 NET ASSETS: Beginning of period 77,404,021 40,160,885 ------------------- ------------------ End of period (including accumulated undistributed net investment income of $73,119 and $157,775, respectively) $ 119,218,049 $ 77,404,021 ------------------- ------------------ ------------------- ------------------
See accompanying notes to the financial statements. 9 GMO ASIA FUND (A Series of GMO Trust) Financial Highlights (For a Class III Share outstanding throughout each period) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ----------------------------------------------------------------- 2000 1999 1998* ---------------- --------------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 7.67 $ 10.44 $ 10.00 ---------------- --------------- -------------- Income (loss) from investment operations: Net investment income 0.03 0.08 (b) 0.01 (b) Net realized and unrealized gain (loss) 5.01 (2.69) 0.43 ---------------- --------------- -------------- Total from investment operations 5.04 (2.61) 0.44 ---------------- --------------- -------------- Less distributions to shareholders from: Net investment income (0.02) (0.08) - In excess of net investment income - (0.08) - Net realized gains (0.34) - - ---------------- --------------- -------------- (0.36) (0.16) - ---------------- --------------- -------------- NET ASSET VALUE, END OF PERIOD $ 12.35 $ 7.67 $ 10.44 ---------------- --------------- -------------- ---------------- --------------- -------------- TOTAL RETURN (a) 65.57% (25.03%) 4.40%*** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 119,218 $ 77,404 $ 40,161 Net expenses to average daily net assets 1.25% 1.26% 2.52% ** Net investment income to average daily net assets 0.22% 1.04% 2.86% ** Portfolio turnover rate 121% 61% 1% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 0.02 $ 0.01
* Period from February 18, 1998 (commencement of operations) to February 28, 1998. ** Annualized *** Not annualized. (a) Calculation excludes subscription and redemption fees. The total return would have been lower had certain expenses not been waived during the periods shown. (b) Computed using average shares outstanding throughout the period. 10 See accompanying notes to the financial statements. GMO ASIA FUND (A Series of GMO Trust) Notes to Financial Statements February 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Asia Fund (the "Fund"), which commenced operations on February 18, 1998, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Asia Fund seeks high total return through investment in equity securities traded in the Asian securities markets. The Fund's benchmark is the GMO Asia 7 Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. See accompanying notes to the financial statements. 11 GMO ASIA FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. There were no forward foreign currency contracts outstanding as of February 29, 2000. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the future, security, or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security, or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security, or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 29, 2000 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. 12 GMO ASIA FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- FUTURES CONTRACTS The Fund may purchase or sell index futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian and agency, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 29, 2000, there were no outstanding futures contracts. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into swap agreements to manage its exposure to the equity markets. The Fund enters into total return swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default 13 GMO ASIA FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- on its obligation to perform or that there may be unfavorable changes in the price of the security or index underlying these transactions. See Note 6 for a summary of the open swap agreements as of February 29, 2000. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund did not have any securities on loan. TAXES The 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"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U. S. federal income tax purposes. Therefore, no provision for U. S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund has recorded a deferred tax liability in respect of unrealized appreciation on foreign securities of $91,443 for potential repatriation taxes at February 29, 2000. The accrual for repatriation taxes is included in net unrealized gain in the Statement of Operations. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to foreign currency and swap transactions, and differing treatments for redemptions in-kind. Gross gains resulting from such in-kind transactions amounted to $245,422. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the 14 GMO ASIA FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U. S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Accumulated Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital - --------------------------- -------------------------- --------------------- $ (111,392) $ (758,742) $870,134
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is 1.20% of the amount invested. In the case of cash redemptions, the fee is .40% of the amount redeemed. These fees will be reduced by 50% with respect to any portion of a purchase or redemption that is offset by a corresponding redemption or purchase, respectively, occurring on the same day. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $127,025 in purchase premiums and $45,840 in redemption fees. There is no premium for reinvested distributions. While no purchase premium is normally charged with respect to in-kind purchases of Fund shares, a purchase premium of up to .20% may be charged on certain in-kind purchases. INVESTMENT RISK Investments in emerging countries present certain risks that are not inherent in many other securities. Many emerging countries present elements of political and/or economic instability. The securities markets of emerging countries are generally smaller and less developed than the securities markets of the 15 GMO ASIA FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- U.S. and developed foreign markets. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging countries are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .81% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding custody fees, brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of 1.00% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding custody fees, brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceeded .81% of average daily net assets. The Manager has entered into a Consulting Agreement with Dancing Elephant, Ltd. (the "Consultant") with respect to the management of the portfolio. 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. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000, was $1,355. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 16 GMO ASIA FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- 3. PURCHASES AND SALES OF SECURITIES For the year ended February 29, 2000, cost of purchases and proceeds from sales of investments, other than short term obligations, were as follows:
Purchases Proceeds --------- -------- U.S. Government Securities $ 2,346,764 $ -- Investments (non-U.S. Government securities) 138,443,412 130,946,604
At February 29, 2000, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation ---------------------------- -------------------------- ------------------------- ------------------------ $120,982,450 $23,726,519 $17,839,316 $5,887,203
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 72.1 % of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's outstanding shares. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ---------------------------------------- ------------------------------------------- Class III: Shares Amount Shares Amount ----------------- ------------------- -------------------- -------------------- Shares sold 886,861 $ 10,585,446 6,185,511 $ 63,691,637 ----------------------------- Shares issued to shareholders in reinvestment of distributions 265,213 3,419,887 113,130 916,087 Shares repurchased (1,595,661) (15,849,306) (49,533) (318,490) ----------------- -------------------- -------------------- -------------------- Net increase (decrease) (443,587) $ (1,843,973) 6,249,108 $ 64,289,234 ----------------- -------------------- -------------------- -------------------- ----------------- -------------------- -------------------- --------------------
17 GMO ASIA FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: SWAP AGREEMENTS
Notional Amount Expiration Net Unrealized Date Description Depreciation ----------------------- -------------- ------------------------------------------------------- -------------------- TOTAL RETURN SWAPS $ 2,675,820 3/02/00 Agreement with Indosuez W.I. Carr Ltd. dated 3/02/99 $ (359,774) to receive (pay) the notional amount multiplied by the return on the Thailand SET Index and to pay the notional amount multiplied by 6 month LIBOR adjusted by a specified spread. 1,777,198 3/03/00 Agreement with Indosuez W.I. Carr Ltd. dated 3/03/99 (261,636) to receive (pay) the notional amount multiplied by the return on the Thailand SET Index and to pay the notional amount multiplied by 6 month LIBOR adjusted by a specified spread. -------------------- $ (621,410) -------------------- --------------------
18 GMO ASIA FUND (A Series of GMO Trust) Federal Tax Information -- (Unaudited) February 29, 2000 - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all the Fund's distributions are from investment company taxable income, except that the Fund has designated 93.95% as net capital gain dividends. 19 GMO ASIA FUND (A Series of GMO Trust) PORTFOLIO MANAGERS Mr. R. Jeremy Grantham and Mr. Arjun Divecha are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham has been with GMO since its founding in 1977. Mr. Divecha is the principal of Dancing Elephant Ltd., which serves as consultant to the Fund. Dancing Elephant Ltd. has an exclusive consulting management agreement with GMO. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Asia Fund returned 65.6% for the fiscal year ended February 29, 2000. The Fund's benchmark, the GMO Asia 7 Index, returned 70.1% during the same period. The Morgan Stanley Emerging Markets Far East Free Index rose 73.6% over the same period. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in common stocks throughout the period. Strong macroeconomic numbers (huge trade surpluses, lower than expected inflation) from Asia completely changed the sentiment for Asian markets. Within Asia, Korea and Malaysia were among the best performing markets, rising 90% while Philippines sank 15% for the year. Country selection detracted 2.0% while our stock selection cost 2.5%. Of our four country selection models, the value and neglect models underperformed while momentum models outperformed. Most of our underperformance in country selection came from overweighting Thailand (+7%) and underweighting Taiwan (-14%). We started the year strongly overweight in Thailand, which rose only 22% for the period while Taiwan gained 75%. Our overweight position in Korea contributed significantly to performance as Korea rose 91% for the year. Stock selection detracted 2.5% from performance as it was a difficult year for value stocks. Overall, value stocks underperformed by 13% in Asia as the Internet and telecommunications mania in developed markets spilled over to emerging markets. The divergence between TMT (technology, media and telecommunications) and old economy stocks was unprecedented. Value stocks in Korea underperformed expensive stocks by a whopping 175%. In China value stocks underperformed by 80% with most of the gains coming from telecommunications stocks. Our emphasis on risk control in addition to a moderate overweight position in China Telecom (50% of China Index) saved us from significant underperformance. OUTLOOK We continue to be enthusiastic about Asia, but are less bullish given the region's huge outperformance relative to the rest of the world. Within Asia, our models have rotated us into Indonesia, Malaysia and China and out of Korea. While we have been aggressively overweight in Korea for the past few years, expensive valuations and the threat of higher interest rates are likely to cap the market. Within Asia, we prefer countries that are likely to have economic growth that will surprise on the upside. These markets, including Indonesia, Malaysia and Thailand, have not participated in the recent rally. Indonesia, trading at under five times peak earnings, could be the most explosive market over the next 5 years. Thailand has gone from being an International Monetary Fund favorite to a totally neglected country as debt restructuring has taken a back seat. While we are disappointed by the slow progress of reforms in Thailand, we are convinced that this market offers good medium-term potential. Poor corporate governance and politics have resulted in Philippines being among the worst performing markets. The market is not cheap and earnings have been disappointing. The technology and telecommunications mania has continued to make value investing a challenge in the short term. Nevertheless, we are confident that our emphasis on buying cheap countries and companies will continue to produce excellent long-term returns. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. - -------------------------------------------------------------------------------- COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO ASIA FUND CLASS III SHARES AND THE MSCI EMF ASIA INDEX AS OF FEBRUARY 29, 2000
- -------------------------------------------------------------------------------- Average Annual Total Return - -------------------------------------------------------------------------------- 1yr Since Inception - -------------------------------------------------------------------------------- 2/18/1998 62.93% 12.67% - --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE] GMO Asia Fund - III As of 2/29/00
Date GMO Asia Fund - III MSCI EMF Asia GMO Asia 7 ---- ------------------- ------------- ---------- 2/18/1998 9880 10000 10000 3/31/1998 10423 10690 11030 6/30/1998 6797 7144 6789 9/30/1998 5522 6122 6233 12/31/1998 8440 8189 9720 3/31/1999 8380 9096 9560 6/30/1999 13395 12725 15262 9/30/1999 10735 11748 12641 12/31/1999 14137 13955 16220 2/29/2000 12740 14362 15501
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares. When redeemed may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect or taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 120 bp on the purchase and 40 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future results. Information is unaudited. - -------------------------------------------------------------------------------- Page> REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of GMO Trust and the Shareholders of GMO Currency Hedged International Core Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Currency Hedged International Core Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 13, 2000 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS - 93.2% AUSTRALIA - 2.7% 32,500 Amcor Ltd 119,759 26,495 Australia and New Zealand Banking Group Ltd 162,882 15,900 Bank of Western Australia 40,915 29,900 Boral Ltd * 42,786 12,600 Caltex Australia Ltd 16,637 94,100 Colonial Ltd 357,152 100,563 CSR Ltd 219,251 26,400 Delta Gold 35,346 26,500 Email Ltd 33,526 74,200 Harvey Norman Holdings Ltd 132,609 4,400 Jupiters Ltd 7,026 5,400 National Australia Bank Ltd 70,971 66,500 National Food Ltd 107,820 49,100 National Mutual Holdings 69,356 63,503 News Corp Ltd 925,635 29,900 Origin Energy Ltd 22,935 15,900 Pacific Dunlop Ltd 15,722 51,252 Pioneer International Ltd 136,608 21,674 PMP Communications Ltd 28,086 125,935 Qantas Airways Ltd 275,341 91,535 QCT Resources Ltd 39,351 42,200 Resolute Ltd 6,479 27,797 Schroders Property 39,606 45,700 Western Mining Corp Holdings Ltd 171,768 101,765 Westfield Trust Units 192,497 36,850 Westpac Banking Corp 235,367 ---------------- 3,505,431 ---------------- AUSTRIA - 3.6% 977 Austria Mikro Systeme International * 43,456 1,270 Austria Tabakwerke AG 50,619 3,464 Austrian Airlines 54,360 21,777 Bank Austria AG 947,654 4,724 Boehler Uddeholm (Bearer) 175,963 5,515 Brau Union AG 229,161 723 EA-Generali AG 112,408 1,696 Energie-Versorgung Niederoesterreich AG 181,243 10,426 Erste Bank Der Oesterreichischen Sparkassen AG 436,637
See accompanying notes to the financial statements. 1 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- AUSTRIA - CONTINUED 3,870 Flughafen Wien AG 139,347 155 Leykam-Muerztaler Papier und Zellstoff AG 4,611 1,006 Mayr-Melnhof Karton AG (Bearer) 55,283 7,346 Oesterreichische Brau Beteiligungs AG 283,602 3,789 OMV AG 296,607 6,378 RHI AG 172,730 550 VA Technologie AG (Bearer) 32,512 43,944 Voest-Alpine Stahl AG 1,353,827 ---------------- 4,570,020 ---------------- BELGIUM - 0.9% 1,400 Almanij NV 53,105 550 Arbed SA 51,098 2,698 Compagnie Benelux Paribas SA 144,940 1,601 Credit Commercial Dexia 218,103 409 Electrabel SA 110,530 400 Electrafina NPV 50,602 250 Glaverbel NPV 16,848 1,650 Groupe Bruxelles Lambert NPV 357,898 2,042 Solvay et Cie 142,137 1,350 Union Miniere NPV 44,190 ---------------- 1,189,451 ---------------- CANADA - 0.9% 9,268 Boliden Ltd SDR * 20,826 14,200 Canadian Marconi Co 153,156 4,200 Hudsons Bay Co 39,800 140 Magna Entertainment Corp * 782 700 Magna International Class A 28,222 19,100 Methanex Corp * 41,201 3,300 Molson Co Ltd Class A 55,379 4,700 NS Power Holdings Inc 42,109 3,200 PanCanadian Petroleum Ltd 47,416 2,100 Potash Corp of Saskatchewan 95,520 3,800 Quebecor Inc Class B 138,539 2,146 Rogers Cantel Mobile Communications Class B * 102,789 1,200 Shell Canada Ltd Class A 21,502 6,900 Stelco Inc Class A 36,854 34,430 Transcanada Pipelines Ltd 234,912 2,200 Westcoast Energy Inc 31,840 ---------------- 1,090,847 ----------------
2 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- DENMARK - 0.1% 590 Den Danske Bank 56,373 430 Kapital Holding AS 15,832 850 Unidanmark AS Class A (Registered) 48,486 ---------------- 120,691 ---------------- FINLAND - 0.9% 10,400 Enso Oyj Class R 105,132 12,200 Fortum Oyj 54,382 800 Helsingin Puhelin Oyj 85,492 700 Instrumentarium Oyj 22,812 2,900 Kesko Oyj 38,390 800 Metra AB Class A 16,290 1,800 Metso Oyj * 23,568 1,500 Pohjola Group Insurance Class B 84,337 16,400 Raisio Group Plc Class V 44,683 1,600 Sampo Insurance Co Ltd Class A 54,684 74 Sanitec Oyj * 976 1,000 Sonera Oyj 77,116 250 Stockmann AB Class A 3,947 3,000 Stora Enso Oyj Class A 30,471 1,000 Tieto Corp 68,837 13,800 UPM-Kymmene Oyj 382,635 ---------------- 1,093,752 ---------------- FRANCE - 11.0% 3,060 Air France * 47,372 2,130 Alcatel Alsthom Cie Generale d'Electricite SA 498,720 12,799 Assurances Generales de France (Bearer) 618,576 22,933 Aventis SA Class A 1,170,174 22,698 Banque Nationale de Paris 1,791,905 215 Bongrain 59,820 2,070 Christian Dior 423,490 180 Clarins 18,543 5,584 Compagnie Generale d'Industrie et de Participations 374,976 380 Credit Commercial de France 43,279 21,900 Credit Lyonnais SA * 742,165 1,021 Dexia * 139,581 2,521 Dexia Strip * 121 4,987 Eridania Beghin-Say SA 418,668 21,700 Eurotunnel SA Units (Bearer) * 26,741
See accompanying notes to the financial statements. 3 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- FRANCE - CONTINUED 90 Fromageries Bel SA 61,000 1,568 Groupe Danone 315,203 3,598 Lafarge Coppee SA 268,458 160 LVMH (Louis Vuitton Moet Hennessy) 59,382 1,900 Metaleurop SA * 17,396 5,750 Michelin SA Class B 179,526 3,440 Pechiney SA Class A 200,699 5,978 Pernod Ricard 302,154 6,462 Peugeot SA 1,331,978 1,700 Remy Cointreau SA * 36,007 23,170 Renault SA 923,506 4,420 Rhodia SA 75,320 5,564 Saint-Gobain 774,049 11,870 Skis Rossignol 174,275 852 Societe Eurafrance 398,648 8,849 Societe Generale Paris 1,834,221 1,380 SPIE Batignolles 89,016 573 Suez Lyonnaise des Eaux 94,333 1,000 Thomson CSF 39,473 33,504 Usinor Sacilor 488,678 1,380 Vallourec 55,801 ---------------- 14,093,254 ---------------- GERMANY - 8.3% 900 AGIV AG 16,116 250 Axel Springer Verlag AG 329,742 4,400 Bankgesellschaft Berlin AG * 69,684 18,000 BASF AG 820,552 16,251 Bayer AG 676,674 3,350 Bayerische Hypotheken und Wechsel-Bank AG 54,829 900 Bayerische Motoren Werke AG 23,048 900 Bayerische Vereinsbank 49,042 2,050 Bilfinger & Berger 29,605 13,000 Buderus AG 200,252 15,600 Commerzbank AG 555,699 7,959 Continental AG 131,029 6,000 DaimlerChrysler AG 406,666 8,194 Deutsche Bank AG 689,479 19,616 Deutsche Telekom 1,641,133
4 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- GERMANY - CONTINUED 1,451 Dredsner Bank AG 69,568 8,400 FAG Kugelfischer 70,358 700 Fresenius Medical Care AG 49,197 2,713 Heidelberg Port-Zement 152,799 3,350 Leirheit AG 101,594 3,500 Lufthansa AG 78,074 900 RWE AG 30,067 150 Schering AG 18,037 300 Schmalbach-Lubeca 36,970 15,679 Siemens AG 2,800,115 4,472 Suedzucker AG 45,207 33,138 Thyssen Krupp AG * 799,185 12,048 Veba AG 538,203 1,100 Viag AG 19,539 600 Volkswagen AG 24,088 ---------------- 10,526,551 ---------------- HONG KONG - 4.7% 129,500 Amoy Properties Ltd 72,797 82,000 Cheung Kong Holdings 1,101,018 36,000 Citic Pacific Ltd 180,860 97,500 CLP Holdings Ltd 429,698 133 Dickson Concept International Ltd 145 290,000 Elec & Eltek International Holdings Ltd 54,402 21,281 Great Eagle Holdings Ltd 28,437 700 Guoco Group 1,390 59,300 Hang Lung Development Co Ltd 46,097 42,000 Henderson Land Development Co Ltd 178,625 768 HKR International Ltd 377 100,700 Hong Kong Aircraft Engineering Co Ltd 137,798 123,500 Hong Kong Electric Holdings Ltd 376,873 43,000 Hong Kong Ferry Co Ltd 34,808 17,000 Hong Kong Land Holdings 21,590 32,400 Hong Kong Telecommunications 108,031 600 Hysan Development Co Ltd 624 95,441 Jardine Matheson Holdings Ltd 334,044 136,500 Jardine Strategic Holdings Ltd 215,670 127 Kumagai Gumi Ltd 30 400 Lai Sun Garment International Ltd * 20
See accompanying notes to the financial statements. 5 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- HONG KONG - CONTINUED 796 Leading Spirit Conrowa Electric * 20 297,400 Mandarin Oriental ADR 153,161 87,600 New Asia Realty & Trust Class A 90,045 79,815 New World Development Co Ltd 114,859 1,000 Oriental Press Group * 379 100 Realty Development Corp Ltd Class A 127 2,939,000 Regal Hotels International Ltd * 215,248 900 Shaw Brothers Ltd 1,249 240,972 South China Morning Post Ltd 239,956 103,000 Sun Hung Kai Properties Ltd 929,710 98,500 Swire Pacific Ltd Class A 472,073 145,000 Wharf Holdings Ltd 248,722 143,200 Wheelock and Co Ltd 95,678 80 Wing Lung Bank 287 46,000 Yue Yuen Industrial Holdings 88,362 ---------------- 5,973,210 ---------------- IRELAND - 0.0% 4,800 Independent News & Media Plc 50,371 ---------------- ITALY - 4.4% 6,801 Banca Commerciale Italiana SPA 28,810 437,500 Banca di Roma 497,441 50,083 Banca Intesa SPA 183,708 12,400 Banca Popolare di Bergamo Credit 246,522 49,200 Banca Popolare di Milano 364,728 133,300 Banco Ambrosiano Veneto SPA (Non Convertible) 275,919 87,297 Banco di Napoli 84,129 16,000 Burgo (Cartiere) SPA 93,964 18,200 Compart SPA * 23,287 8,000 Credito Fondiario * 7,779 21,769 Fiat SPA 662,276 13,017 Fiat SPA (Non Convertible) 187,480 305,580 HPI SPA 647,234 23,350 IFIL Finanziaria di Partecipazioni SPA 249,755 29,250 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 133,199 21,650 Immsi SPA * 49,608 10,000 Industriali Riunite SPA 56,995 2,200 Industrie Natuzzi SPA ADR 24,888
6 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL CORE FUND [cad 192](A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- ITALY - CONTINUED 25,850 Italcementi Fabbriche Riunite Cemento SPA (Non Convertible) 84,616 1,600 Italmobiliare SPA 34,351 5,000 Magneti Marelli SPA 19,014 199,934 Montedison SPA 351,288 107,304 Montedison SPA (Non Convertible) 112,398 75,000 Parmalat Finanziaria SPA 81,521 54,700 Pirelli & Co 121,914 37,781 RAS SPA 329,182 21,650 Sirti SPA 51,067 35,000 SNIA BPD SPA 40,402 11,000 Societa Assicuratrice Industriale (SAI) 43,632 19,800 Tecnost SPA * 82,350 39,870 Telecom Italia SPA (Non Convertible) 314,756 7,700 Toro Assicurazioni 79,988 ---------------- 5,564,201 ---------------- JAPAN - 23.7% 2,000 Acom Ltd 212,280 3,000 Anritsu Corp 29,767 4,200 Arabian Oil Co Ltd * 24,851 53,000 Asahi Bank 224,341 2,000 Asahi Breweries Ltd 19,426 3,000 Asahi Glass Co Ltd 20,482 2,000 Autobacs Seven 48,063 3,000 Bandai Co 114,970 26,000 Bank of Yokohama 92,777 12,000 Brother Industries Ltd 25,670 21,000 Canon Sales Co Inc 277,184 5,000 Chiba Bank 21,574 9,800 Chubu Electric Power Co Inc 139,254 14,000 Chugai Pharmaceutical Co Ltd 214,100 7,600 Chugoku Electric Power Co Inc 94,088 115,000 Cosmo Oil Co Ltd 125,620 26,000 Daicel Chemical Industries Ltd 86,387 17,000 Daido Steel Co Ltd 23,212 25,000 Dai-Ichi Kangyo Bank 197,988 16,000 Daiichi Pharmaceuticals Co Ltd 207,546 7,000 Dainippon Printing Co Ltd 104,820 24,000 Daishowa Paper Manufacturing * 105,521
See accompanying notes to the financial statements. 7 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- JAPAN - CONTINUED 4,000 Daito Trust Construction Co Ltd 52,069 217,000 Daiwa Bank 539,265 78,000 Daiwa House Industry Co Ltd 533,230 8,000 Daiwa Kosho Lease Co Ltd 19,662 37,000 Daiwa Securities Co Ltd 587,729 13,000 Ezaki Glico Co Ltd 60,116 82,000 Fuji Bank 638,951 13,800 Fuji Photo Film Co Ltd 606,745 48,000 Fujita Corp * 21,847 12,000 Fukuyama Transporting Co Ltd 85,531 28,000 General Sekiyu (KK) 50,976 1,000 Heiwa Corp 19,025 52,000 Hino Motors * 125,911 143,000 Hitachi Ltd 1,951,273 3,700 Hokkaido Electric Power 44,391 14,000 Hokuriku Bank * 28,929 9,000 Honda Motor Co Ltd 294,934 3,000 House Foods Corp 43,694 3,000 INAX Corp 15,266 23,000 Industrial Bank of Japan 179,846 29,000 Ishikawajima-Harima Heavy Industries 29,566 62,000 Itochu Corp * 338,628 12,000 Itoham Foods Inc 46,971 8,000 Japan Airport Terminal Co Ltd 62,774 117,000 Japan Energy Co Ltd 91,593 20,000 Japan Radio Co 207,546 8,000 Japan Securities Finance Co 46,898 6,000 Japan Synthetic Rubber Co Ltd 46,425 75 Japan Tobacco Inc 535,934 2,000 Jusco Co Ltd 28,164 52,000 Kajima Corp 132,538 9,000 Kandenko Co 32,443 9,900 Kansai Electric Power 145,091 51,000 Kawasaki Heavy Industries Ltd 53,389 16,000 Kawasaki Kisen 21,993 76,000 Keio Teito Electric Railway Co Ltd 254,590 11,000 Kirin Brewery Co Ltd 131,273 4,000 Kissei Pharmaceutical Co Ltd 67,362
8 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- JAPAN - CONTINUED 175,000 Kobe Steel Ltd * 100,360 1,000 Kokusai Denshin Denwa 93,305 12,000 Komatsu Ltd 53,088 119,000 Kubota Corp 346,639 55,000 Kumagai Gumi Co Ltd * 28,538 40,000 Kyowa Hakko Kogyo Co Ltd 520,686 33,800 Kyushu Electric Power Co Inc 401,828 24,000 Maeda Corp 67,726 3,000 Maeda Road Construction 12,152 145,000 Marubeni Corp 590,005 4,000 Marui Co Ltd 52,433 18,000 Matsushita Electric Industrial Co Ltd 524,328 6,000 Meiji Milk Products 37,686 29,000 Mitsubishi Corp 214,091 99,000 Mitsubishi Electric Corp 876,856 274,000 Mitsubishi Heavy Industries 750,753 66,000 Mitsubishi Material * 219,289 53,000 Mitsubishi Motors * 168,377 10,000 Mitsubishi Trust & Banking 68,272 16,000 Mitsui Fudosan Co Ltd 128,460 50,000 Mitsui Petrochemical Industries Ltd 360,930 223,000 Mitsui Trust & Banking Co Ltd 345,091 7,000 Mitsui & Co 43,330 4,000 Mochida Pharmaceutical Co Ltd 22,284 33,000 Mycal Corp 119,558 14,000 New Japan Securities Co Ltd * 64,358 16,000 New Oji Paper Co Ltd 76,756 1,000 Nichiei Co Ltd (Kyoto) * 20,208 93,000 Nichirei 236,193 8,000 Nikko Securities 103,191 1,800 Nintendo Co Ltd 393,082 23,000 Nippon Express Co Ltd 153,675 13,000 Nippon Hodo Co 53,962 22,000 Nippon Light Metal 14,018 10,000 Nippon Meat Packers Inc 91,939 165,550 Nippon Oil Co Ltd 581,697 44,000 Nippon Shinpan Co 100,132 23,000 Nishimatsu Construction 69,929
See accompanying notes to the financial statements. 9 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- JAPAN - CONTINUED 279,000 Nissan Motor Co * 1,053,980 16,000 Nisshin Oil Mills Ltd 42,966 41,000 Nisshin Steel Co Ltd 38,068 68,000 Nisshinbo Industries Inc 255,646 185,000 Nissho Iwai Corp * 126,303 404,000 NKK Corp * 220,655 19,000 Obayashi Corp 53,962 31,000 Odakyu Electric Railway 91,430 51,000 Oki Electric Industry * 305,011 17,000 Okumura Corp 46,425 3,000 Ono Pharmaceutical Co Ltd 84,657 42,000 Onoda Cement Co Ltd 63,465 13,000 Onward Kashiyama Co Ltd 125,556 33,000 Orient Corp 121,360 12,000 Penta Ocean Construction * 14,965 2,000 Pioneer Electronics Corp 63,538 7,000 Promise Co 516,772 6,000 Q.P. Corp 45,332 71,000 Renown Inc 104,702 5,000 Royal Co Ltd 40,508 7,000 Ryosan Co 114,633 38,000 Sagami Railway Co Ltd 96,855 269,000 Sakura Bank Ltd 1,535,324 11,000 Sankyo Co Ltd 227,800 2,000 Sanwa Bank Ltd 18,406 55,000 Sanyo Electric Co 224,296 500 Secom Co Ltd 44,786 40,000 Seino Transportation Co Ltd 200,628 55,000 Sekisui Chemical 172,227 80,000 Sekisui House Ltd 597,151 25,200 Shikoku Electric Power 303,946 40,000 Shimizu Corp 96,491 5,000 Shionogi and Co Ltd 71,458 32,000 Showa Shell Sekiyu 108,361 22,000 Snow Brand Milk Products Co Ltd 92,322 30,000 Stanley Electric Co Ltd 231,578 8,000 Sumitomo Corp 88,699 5,000 Sumitomo Electric 65,905
10 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- JAPAN - CONTINUED 4,000 Sumitomo Forestry Co Ltd 23,704 171,000 Sumitomo Metal Industries * 93,396 84,000 Sumitomo Trust & Banking 474,844 16,000 Suzuki Motor Corp 258,814 91,000 Taisei Corp 133,367 3,000 Taisho Pharmaceutical Co Ltd 84,657 6,000 Takara Standard Co 21,902 10,000 Takuma Corp 68,818 8,000 Tanabe Seiyaku Co Ltd 48,646 700 TDK Corp 66,970 34,000 Teijin Ltd 133,394 58,000 Teikoku Oil Co Ltd 165,254 3,000 The Bank of Fukuoka Ltd 16,740 9,000 TOA Corp 10,241 46,000 Toei Co Ltd 418,315 16,000 Tohoku Electric Power Co Inc 189,340 56,000 Tokai Bank 256,411 12,000 Tokyo Gas Co 22,065 4,000 Tokyo Steel Manufacturing Co 8,994 76,000 Tomen Corp 44,968 10,000 Toppan Printing Co Ltd 98,585 14,000 Toray Industries Inc 44,604 8,000 Tostem Corp 110,327 5,000 Toto Ltd 24,305 18,000 Toyo Seikan Kaisha 235,128 5,000 Toyo Suisan Kaisha 30,950 30,000 Toyo Trust & Banking Co Ltd 86,022 144,000 Toyobo Co Ltd 190,069 5,000 Yakult Honsha Co Ltd 41,919 1,000 Yamanouchi Pharmaceutical Co Ltd 47,790 254,000 Yasuda Trust & Banking * 323,699 ---------------- 30,168,099 ---------------- LUXEMBOURG - 0.0% 830 Carrier1 International SA ADR * 26,923 ---------------- NETHERLANDS - 2.7% 17,500 ABN Amro Holdings NV 362,235 5,200 Buhrmann NV Maastricht 136,922 6,600 DSM NV 216,486
See accompanying notes to the financial statements. 11 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- NETHERLANDS - CONTINUED 15,400 Fortis (NL) NV 386,671 7,000 ING Groep NV 353,945 5,050 KLM-Konin Luchtvaart Mij NV 94,078 10,750 Kon Bolswessanen 115,915 4,500 Koninklijke KPN NV 572,090 3,700 Nedlloyd 84,780 19,900 Royal Dutch Petroleum 1,040,127 3,850 Stork NV 47,259 1,400 VIB NV 34,235 ---------------- 3,444,743 ---------------- NEW ZEALAND - 0.1% 14,600 Air New Zealand Class B 14,889 257,000 Brierley Investment Ltd 46,176 58,100 Carter Holt Harvey Ltd 56,145 36,700 Lion Nathan Ltd 66,118 ---------------- 183,328 ---------------- NORWAY - 3.0% 10,100 Bergesen d.y. ASA Class A 168,564 5,400 Bergesen d.y. ASA Class B 88,514 72,900 Christiania Bank OG Kreditkasse 369,345 183,563 Den Norske Bank Class A 665,234 1,700 Dyno Industrier AS 40,532 2,300 Elkem AS Class A 39,757 14,000 Fred Olsen Energy * 113,489 1,700 Kvaerner ASA Class B * 23,610 20,200 Kvaerner ASA * 349,169 200 Leif Hoegh and Co AS 1,943 3,100 Merkantildata ASA 35,847 25,600 Norsk Hydro AS 953,687 5,400 Norske Skogindustrier ASA Class A 207,928 1,400 Norske Skogindustrier ASA Class B 42,642 7,000 Orkla ASA 106,813 33,400 Petroleum Geo-Services * 523,586 2,700 SAS Norge ASA Class B 23,979 900 Schibsted ASA 26,286 1,500 Smedvig ASA Class A 19,133 1,500 Smedvig ASA Class B 17,166 3,000 Storebrand * 18,239 14,100 Tandberg Data ASA * 27,062 ---------------- 3,862,525 ----------------
12 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- PORTUGAL - 0.4% 1,669 Banco Espirito Santo e Commercial de Lisboa (Registered) 43,336 4,550 Banco Portugues do Atlantico * 18,486 7,062 BPI-SGPS SA (Registered) 26,244 23,153 Electricidade de Portugal 462,083 ---------------- 550,149 ---------------- SINGAPORE - 4.9% 41,000 Cerebos Pacific Ltd 72,785 30,000 City Developments Ltd 121,831 252,000 Comfort Group 112,572 21,000 Creative Technology Ltd 456,866 31,489 DBS Group Holdings Ltd 389,114 292,000 DBS Land Ltd 386,239 59,564 Haw Par Brothers International Ltd 101,594 39,000 Hotel Properties Ltd 34,391 24,308 Inchcape Berhad 18,897 38,000 Keppel Bank Ltd 78,041 31,000 Keppel Corp 69,420 38,000 Keppel Land Ltd 43,430 58,000 Marco Polo Developments Ltd 61,913 26,000 Natsteel Ltd 51,587 38,700 Oversea-Chinese Banking Corp 244,724 188,517 Overseas Union Bank 836,662 49,100 Robinson and Co Ltd 141,287 60,780 Shangri-La Asia Ltd 49,591 181,000 Singapore Airlines Ltd (Registered) 1,680,107 63,000 Singapore Land Ltd 116,227 24,826 Singapore Press Holdings 475,290 96,000 Singapore Telecom 155,944 147,000 Straits Trading Co Ltd 153,507 27,000 Times Publishing Ltd 55,137 49,000 United Industrial Corp Ltd 21,320 7,392 United Overseas Bank 46,744 188,000 United Overseas Land 131,972 221,000 Wing Tai Holdings 165,394 ---------------- 6,272,586 ---------------- SPAIN - 1.6% 17,400 Compania Espanola de Petroleos 166,681 1,400 Corporacion Mapfre (Registered) 19,220 35,700 Endesa 755,113 57,527 Repsol SA 1,088,298 ---------------- 2,029,312 ----------------
See accompanying notes to the financial statements. 13 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- SWEDEN - 4.8% 24,974 Assi Doman 367,474 44,742 Avesta Sheffield AB * 175,559 5,800 Drott AB Class B 56,895 2,700 Electrolux AB 50,816 20,850 Foreningssparbanken AB Class A 263,984 16,385 Gambro AB Class A 114,005 17,056 Gambro AB Class B 120,620 1,200 Investor AB Class A 17,246 10,800 Investor AB Class B 157,682 32,577 Mo Och Domsjo AB Class B 921,535 102,900 Nordbanken Holdings AB 539,911 4,100 Skandia Forsakrings AB 167,891 54,300 Skandinaviska Enskilda Banken Class A 545,044 900 Skanska AB Class B 31,003 6,600 SKF AB Class B 130,991 12,600 SSAB Swedish Steel Class A 153,063 3,300 SSAB Swedish Steel Class B 39,335 28,877 Svenska Cellulosa Class B 703,233 35,600 Svenska Handelsbanken Class A 416,220 5,000 Svenska Kullagerfabriken AB 93,533 772 Sydkraft AB Class C 14,089 41,718 Trelleborg AB Class B 292,649 4,400 Volvo AB Class A 97,365 25,600 Volvo AB Class B 602,988 ---------------- 6,073,131 ---------------- SWITZERLAND - 1.7% 70 Ascom Holding AG (Bearer) 277,751 340 Baloise Holdings 264,924 100 Banque Cantonale Vaudoise (Bearer) 28,171 910 BK Vision AG (Bearer) * 166,357 40 Financiere Richemont AG Class A 92,304 350 Fischer (Georg) AG (Registered) 104,471 70 Helvetia Patria Holding 48,250 60 Jelmoli (Bearer) 76,600 430 Merkur Holding AG (Registered) 123,711 90 Pargesa Holdings SA (Bearer) 169,923 210 Pharma Vision * 159,224 660 SAir Group (Registered) 125,402
14 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- SWITZERLAND - CONTINUED 120 Schweizerische Industrie-Gesellschaft Holding AG (Registered) 72,141 450 Schweizerische Lebensversicherungs-und Rentenanstalt 223,058 130 Sika Finanz AG (Bearer) 42,933 100 Sulzer Gebrueder AG (Registered) * 65,152 412 UBS AG (Registered) 100,135 ---------------- 2,140,507 ---------------- UNITED KINGDOM - 12.8% 3,900 3i Group Plc 69,448 8,300 Abbey National Plc 93,161 7,300 Allied Zurich Plc 62,058 6,100 AMEC 14,974 21,500 Anglian Water Plc 151,207 12,440 Arcadia Group 9,917 51,000 Arjo Wiggins Appleton Plc 127,208 49,646 Associated British Food 277,247 24,300 BAA 144,526 20,150 Barclays Plc 485,418 10,999 Barratt Development 29,865 41,056 Bass Plc 435,220 140,806 BG Group Plc 614,058 8,200 Boots Co 59,611 76,840 British Airways Plc 362,697 8,036 British Energy Plc 30,542 19,018 British Energy Plc (Deferred Shares) * - 123,700 Coats Viyella 79,576 4,100 Commercial Union Plc 48,899 238,195 Corus Group Plc 394,828 65,500 Courtaulds Textiles Plc 129,769 6,930 De Vere Group Plc 29,730 28,500 Diageo Plc 217,534 28,500 Great Portland Estates Plc 80,760 53,300 Halifax Group Plc 477,927 7,400 Hammerson Plc 37,616 55,512 Hazlewood Foods 66,164 20,100 HSBC Holdings Plc 234,015 13,100 Hyder Plc 41,619 23,617 Inchcape Plc 90,411 5,600 Johnson Matthey 63,828 38,700 Laird Group 118,216
See accompanying notes to the financial statements. 15 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- UNITED KINGDOM - CONTINUED 40,080 Land Securities 436,895 39,531 Lonrho Plc 424,358 186,200 Marks & Spencer 668,724 35,122 MEPC Plc 186,851 169,158 National Power 999,402 17,500 Northern Foods Plc 25,554 16,600 Norwich Union Plc 102,398 22,100 Peninsular & Oriental Steam Navigation Co 248,927 53,641 Powergen Plc 369,842 3,303 Railtrack Group Plc 33,632 7,628 RMC Group 87,906 6,300 Royal Bank of Scotland Group 82,846 42,315 Royal & Sun Alliance Insurance Group 231,130 222,200 Sainsbury (J) 913,772 64,066 Scottish Hydro-Electric Plc 536,283 151,035 Scottish Power Plc 1,146,855 7,400 Scottish & Newcastle Plc 47,955 47,230 Severn Trent Plc 393,302 19,640 Shell Transport & Trading (Registered) 135,025 21,600 Slough Estates 95,306 9,000 Southwest Water 60,170 31,430 Storehouse Plc 22,080 5,426 Tarmac Plc 49,853 6,700 Tate & Lyle 27,130 44,300 Taylor Woodrow Plc 94,761 323,500 Tesco 875,839 41,404 Thames Water Plc 454,269 17,186 Thistle Hotels Plc 39,475 47,947 Transport Development Group Plc 180,524 50,817 United Biscuits Plc 208,979 90,155 United Utilities 931,505 55,540 Viglen Technology Plc (Entitlement Letters) * - 45,510 Vodafone Group Plc 255,227 12,081 Whitbread Plc Class A 100,031 231,269 Wilson (Connolly) Holdings 472,795 5,800 Woolwich Plc 26,553 77,277 Yorkshire Water 315,658 ---------------- 16,359,861 ---------------- TOTAL COMMON STOCKS (Cost $125,108,498) 118,888,943 ----------------
16 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- INVESTMENT FUNDS - 1.2% HONG KONG - 1.2% 722,300 Tracker Fund of Hong Kong * 1,582,363 ---------------- TOTAL INVESTMENT FUNDS (Cost $1,209,146) 1,582,363 ---------------- PREFERRED STOCKS - 0.8% AUSTRIA - 0.1% 2,873 Bau Holdings AG (Non Voting) 106,490 ---------------- GERMANY - 0.2% 550 Hugo Boss AG 66,983 1,900 MAN AG 38,139 9,000 Villeroy & Boch AG (Non Voting) 79,716 4,650 Volkswagen AG 106,100 ---------------- 290,938 ---------------- ITALY - 0.5% 18,000 Compagnia Assicuratrice Unipol 32,060 24,480 Fiat SPA 414,799 8,500 IFI-Istituto Finanziario 215,223 4,000 La Rinascente SPA 13,941 ---------------- 676,023 ---------------- TOTAL PREFERRED STOCKS (Cost $1,324,749) 1,073,451 ---------------- RIGHTS & WARRANTS - 0.1% AUSTRALIA - 0.0% 1,770 Franked Income Fund Warrants 12/31/02 * 217 ---------------- FRANCE - 0.1% 155,500 Eurotunnel SA Paris Warrants 10/31/01 * 4,491 155,500 Eurotunnel SA Paris Warrants 10/31/03 * 11,977 3,420 Generale des Eaux Warrants 5/02/01 * 18,965 3,598 Lafarge Co Rights 3/03/00 * 104 ---------------- 35,537 ---------------- HONG KONG - 0.0% 9,400 Gold Peak Industries Ltd Warrants 8/06/00 * 106 59,480 Mandarin Oriental International Ltd Rights 3/06/00 * 595 6 Mandarin Oriental International Ltd Rights 3/06/00 * - ---------------- 701 ----------------
See accompanying notes to the financial statements. 17 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
Shares/ Par Value ($) Description Value ($) - ----------------------------------------------------------------------------------------------------------- ITALY - 0.0% 11,801 Banca Intesa SPA Warrants 11/15/02 * 31,585 ---------------- SINGAPORE - 0.0% 113,800 Asia Food & Properties Ltd Warrants 7/12/02 * 23,437 9,500 Haw Par Brothers International Ltd Warrants 7/18/01 * 6,063 ---------------- 29,500 ---------------- TOTAL RIGHTS & WARRANTS (Cost $96,855) 97,540 ---------------- SHORT-TERM INVESTMENTS - 4.9% CASH EQUIVALENTS - 3.9% $ 3,300,000 Banque Nationale Paribas (London) Time Deposit, 5.81% due 3/01/00 3,300,000 1,662,165 The Boston Global Investment Trust (a) 1,662,165 ---------------- 4,962,165 ---------------- U.S. GOVERNMENT - 1.0% $ 1,300,000 U.S. Treasury Bill, 5.09% due 1/04/01 (b) 1,234,277 ---------------- TOTAL SHORT-TERM INVESTMENTS (Cost $6,198,667) 6,196,442 ---------------- TOTAL INVESTMENTS - 100.2% (Cost $133,937,915) 127,838,739 Other Assets and Liabilities (net) - (0.2%) (258,655) ---------------- TOTAL NET ASSETS - 100.0% $ 127,580,084 ---------------- ----------------
NOTES TO THE SCHEDULE OF INVESTMENTS: ADR American Depositary Receipt SDR Swedish Depository Receipt (a) Represents investment of security lending collateral (Note 1). (b) All or a portion of this security is held as collateral for open futures contracts (Note 6). * Non-income producing security. 18 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 - -------------------------------------------------------------------------------- At February 29, 2000, industry sector diversification of the Fund's equity investments was as follows: INDUSTRY SECTOR (UNAUDITED) Banking 16.9% Utilities 7.5 Electronic Equipment 6.5 Conglomerates 6.3 Automotive 5.3 Energy Services 4.7 Consumer Goods 4.2 Real Estate 4.0 Transportation 3.8 Construction 3.6 Chemicals 3.5 Metals and Mining 3.5 Financial Services 3.4 Services 3.3 Machinery 3.0 Paper and Allied Products 2.9 Telecommunications 2.8 Retail Trade 2.6 Insurance 2.4 Communications 1.8 Food and Beverage 1.8 Health Care 1.4 Textiles 1.1 Aerospace 0.1 Computers 0.1 Miscellaneous 3.5 ----------- 100.0% ----------- -----------
See accompanying notes to the financial statements. 19 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust)
Statement of Assets and Liabilities - February 29, 2000 - ------------------------------------------------------------------------------------------------------ ASSETS: Investments, at value (cost $133,937,915) (Note 1) $ 127,838,739 Foreign currency, at value (cost $599,097) (Note 1) 592,513 Cash 90,690 Receivable for investments sold 15,428 Net receivable for open forward foreign currency contracts (Notes 1 and 6) 1,012,858 Dividends and interest receivable 86,639 Foreign withholding taxes receivable 180,669 Receivable for expenses waived or borne by Manager (Note 2) 23,638 ------------------ Total assets 129,841,174 ------------------ LIABILITIES: Payable for investments purchased 311,075 Payable upon return of securities loaned (Note 1) 1,662,165 Payable for variation margin on open futures contracts (Notes 1 and 6) 114,248 Payable to affiliate for (Note 2): Management fee 55,840 Shareholder service fee 13,000 Accrued expenses 104,762 ------------------ Total liabilities 2,261,090 ------------------ NET ASSETS $ 127,580,084 ------------------ ------------------ NET ASSETS CONSIST OF: Paid-in capital $ 127,006,663 Distributions in excess of net investment income (2,037,299) Accumulated undistributed net realized gain 7,386,807 Net unrealized depreciation (4,776,087) ------------------ $ 127,580,084 ------------------ ------------------ NET ASSETS ATTRIBUTABLE TO: Class III Shares $ 75,053,739 ------------------ ------------------ Class IV Shares $ 52,526,345 ------------------ ------------------ SHARES OUTSTANDING: Class III 7,474,417 ------------------ ------------------ Class IV 5,235,942 ------------------ ------------------ NET ASSET VALUE PER SHARE: Class III $ 10.04 ------------------ ------------------ Class IV $ 10.03 ------------------ ------------------
20 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust)
Statement of Operations - Year Ended February 29, 2000 - ------------------------------------------------------------------------------------------------------ INVESTMENT INCOME: Dividends (net of foreign tax expense of $484,763) $ 4,636,796 Interest (including securities lending income of $38,454) 591,697 ------------------ Total income 5,228,493 ------------------ EXPENSES: Management fee (Note 2) 886,758 Custodian fees 425,041 Audit fees 55,274 Transfer agent fees 43,809 Legal fees 3,348 Registration fees 2,864 Trustees fees (Note 2) 1,691 Miscellaneous 4,285 Fees waived or borne by Manager (Note 2) (536,312) ------------------ 886,758 Shareholder service fee - (Note 2) Class III 127,019 Class IV 71,569 ------------------ Net expenses 1,085,346 ------------------ Net investment income 4,143,147 ------------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments 8,708,081 Closed futures contracts 2,775,168 Foreign currency, forward contracts and foreign currency related transactions 8,527,332 ------------------ Net realized gain 20,010,581 ------------------ Change in net unrealized appreciation (depreciation) on: Investments (Note 1) 9,513,611 Open futures contracts (371,579) Foreign currency, forward contracts and foreign currency related transactions (367,134) ------------------ Net unrealized gain 8,774,898 ------------------ Net realized and unrealized gain 28,785,479 ------------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 32,928,626 ------------------ ------------------
See accompanying notes to the financial statements. 21 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Statement of Changes in Net Assets - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED INCREASE (DECREASE) IN NET ASSETS: FEBRUARY 29, 2000 FEBRUARY 28, 1999 ---------------------- --------------------- OPERATIONS: Net investment income $ 4,143,147 $ 7,386,370 Net realized gain 20,010,581 31,666,041 Change in net unrealized appreciation (depreciation) 8,774,898 (30,470,928) ---------------------- --------------------- Net increase in net assets resulting from operations 32,928,626 8,581,483 ---------------------- --------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income Class III (2,479,440) (1,029,703) Class IV (1,769,224) (1,302,562) ---------------------- --------------------- Total distributions from net investment income (4,248,664) (2,332,265) ---------------------- --------------------- In excess of net investment income Class III (703,048) (2,513,584) Class IV (501,666) (3,179,653) ---------------------- --------------------- Total distributions in excess of net investment income (1,204,714) (5,693,237) ---------------------- --------------------- Net realized gains Class III (2,379,277) (28,178,223) Class IV (3,607,975) (33,629,347) ---------------------- --------------------- Total distributions from net realized gains (5,987,252) (61,807,570) ---------------------- --------------------- (11,440,630) (69,833,072) ---------------------- --------------------- NET SHARE TRANSACTIONS - (NOTE 5) Class III (30,221,889) (78,616,879) Class IV (70,092,083) (224,207,117) ---------------------- --------------------- Decrease in net assets resulting from net share transactions (100,313,972) (302,823,996) ---------------------- --------------------- Total decrease in net assets (78,825,976) (364,075,585) NET ASSETS: Beginning of period 206,406,060 570,481,645 ---------------------- --------------------- End of period (including distributions in excess of net investment income of $2,037,299 and $982,318, respectively) $ 127,580,084 $ 206,406,060 ---------------------- --------------------- ---------------------- ---------------------
22 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Financial Highlights (For a Class III Share Outstanding Throughout Each Period) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, --------------------------------------- -------------------------- 2000 1999 1998 1997 1996 * --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.28 $ 11.92 $ 12.68 $ 11.54 $ 10.00 --------- --------- --------- --------- --------- Income from investment operations: Net investment income 0.23 + 0.23 + 0.27 + 0.22 0.23 Net realized and unrealized gain (loss) 1.26 (0.36) (c) 1.72 1.63 1.44 --------- --------- --------- --------- --------- Total from investment operations 1.49 (0.13) 1.99 1.85 1.67 --------- --------- --------- --------- --------- Less distributions to shareholders from: Net investment income (0.33) (0.08) (0.27) (0.28) (0.06) In excess of net investment income (0.09) (0.21) - - - Net realized gains (0.31) (2.22) (2.48) (0.43) (0.07) --------- --------- --------- --------- --------- Total distributions (0.73) (2.51) (2.75) (0.71) (0.13) --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD $ 10.04 $ 9.28 $ 11.92 $ 12.68 $ 11.54 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- TOTAL RETURN (a) 15.86% (1.84%) 17.98% 16.55% 16.66% *** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 75,054 $ 97,450 $207,653 $581,099 $407,227 Net expenses to average daily net assets 0.69% 0.69% 0.69% 0.72% (b) 0.69% ** Net investment income to average daily net assets 2.25% 2.07% 2.15% 2.25% 1.89% ** Portfolio turnover rate 68% 68% 96% 84% 7% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.03 $ 0.05 $ 0.05 $ 0.04 $ 0.05
* Period from June 30, 1995 (commencement of operations) to February 29, 1996. ** Annualized. *** Not annualized. + Computed using average shares outstanding throughout the period. (a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .03% of average daily net assets. (c) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments for the year ended February 28, 1999 due to timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund. See accompanying notes to the financial statements. 23 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Financial Highlights (For a Class IV Share Outstanding Throughout Each Period)
- ------------------------------------------------------------------------------------------------------------------------------- Year Ended February 28/29, -------------------------------------------------------------------- 2000 1999 1998 * ------------------- ------------------- ------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 9.27 $ 11.92 $ 10.87 ------------------- ------------------- ------------------ Income from investment operations: Net investment income 0.29 + 0.24 + 0.01 + Net realized and unrealized gain (loss) 1.21 (0.36) (b) 1.04 ------------------- ------------------- ------------------ Total from investment operations 1.50 (0.12) 1.05 ------------------- ------------------- ------------------ Less distributions to shareholders from: Net investment income (0.34) (0.09) - In excess of net investment income (0.09) (0.22) - Net realized gains (0.31) (2.22) - ------------------- ------------------- ------------------ Total distributions (0.74) (2.53) - ------------------- ------------------- ------------------ NET ASSET VALUE, END OF PERIOD $ 10.03 $ 9.27 $ 11.92 ------------------- ------------------- ------------------ ------------------- ------------------- ------------------ TOTAL RETURN (a) 15.94% (1.79%) 9.66% *** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 52,526 $ 108,956 $ 362,829 Net expenses to average daily net assets 0.63% 0.63% 0.63% ** Net investment income to average daily net assets 2.81% 2.17% 0.72% ** Portfolio turnover rate 68% 68% 96% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.03 $ 0.05 $ 0.01
* Period from January 9, 1998 (commencement of operations) to February 28, 1998. ** Annualized. *** Not annualized. + Computed using average shares outstanding throughout the period. (a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments for the year ended February 28, 1999 due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund. 24 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements February 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Currency Hedged International Core Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities of non-U.S. issuers and through management of the Fund's foreign currency positions. The Fund's benchmark is the MSCI EAFE Index (Hedged). The Fund offers two classes of shares: Class III and Class IV. The principal economic difference between the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully described in the Trust's prospectus. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from 25 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 29, 2000. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 29, 2000 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums 26 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. FUTURES CONTRACTS The Fund may purchase and sell stock index futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock market. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into swap agreements to manage its exposure to the equity markets. The Fund enters into total return swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 29, 2000, there were no open swap agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for 27 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- lending its securities. At February 29, 2000, the Fund loaned securities having a market value of $1,569,733 collateralized by cash in the amount of $1,662,165 which was invested in a short-term instrument. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund has incurred $535,172 related to repatriation taxes which is included in net realized gain in the Statement of Operations. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. The Fund declares separate dividends from net investment income on each class of shares. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to foreign currency and passive foreign investment company transactions, foreign taxes, and differing treatments for redemptions in-kind. Gross gains resulting from such in-kind transactions amounted to $8,925,740. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Accumulated Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital - --------------------------- -------------------------- ----------------------- $255,250 $ (2,206,578) $1,951,328
28 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .60% of the amount invested. All purchase premiums are paid to and recorded by the Fund as paid-in capital. These fees are allocated relative to each class' net assets on the share transaction date. For the year ended February 29, 2000, the Fund received $6,609 in purchase premiums. There is no premium for cash redemptions or reinvested distributions. While no purchase premium is normally charged with respect to in-kind purchases of Fund shares, a purchase premium of up to .10% may be charged on certain in-kind purchases. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .15% for Class III shares and .09% for Class IV shares. 29 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .75% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceeded .54% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000, was $1,691. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $102,164,945 and $183,495,426, respectively. At February 29, 2000, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation ---------------------------- -------------------------- ------------------------- ------------------------- $136,968,819 $14,032,029 $23,162,109 $9,130,080
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 56% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the outstanding shares of the Fund. 30 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended Class III: February 29, 2000 February 28, 1999 -------------------------------------------- ----------------------------------------- Shares Amount Shares Amount -------------------- ---------------------- ------------------- -------------------- Shares sold 1,086,050 $ 10,842,254 563,792 $ 5,359,120 Shares issued to shareholders in reinvestment of distributions 461,723 4,817,120 3,031,071 31,219,975 Shares repurchased (4,578,895) (45,881,263) (10,514,340) (115,195,974) --------------------- -------------------- -------------------- ------------------ Net decrease (3,031,122) $ (30,221,889) (6,919,477) $ (78,616,879) --------------------- -------------------- -------------------- ------------------ --------------------- -------------------- -------------------- ------------------ Year Ended Year Ended Class IV: February 29, 2000 February 28, 1999 -------------------------------------------- ----------------------------------------- Shares Amount Shares Amount -------------------- ---------------------- ------------------- -------------------- Shares sold _ $ _ _ $ 6,173 Shares issued to shareholders in reinvestment of distributions 345,952 3,649,790 3,403,005 35,243,016 Shares repurchased (6,862,374) (73,741,873) (22,085,761) (259,456,306) --------------------- -------------------- -------------------- ------------------ Net decrease (6,516,422) $ (70,092,083) (18,682,756) $ (224,207,117) --------------------- -------------------- -------------------- ------------------ --------------------- -------------------- -------------------- ------------------
31 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ------------------ ------------------------- ---------------------- ------------------- ------------------- Buys 4/07/00 AUD 6,657,776 $ 4,090,458 $ (257,187) 4/07/00 CAD 17,193,222 11,859,937 109,841 3/03/00 CHF 49,230,097 29,510,643 (2,258,229) 9/08/00 CHF 16,862,576 10,305,045 (266,288) 3/03/00 DKK 89,637,714 11,621,598 (732,860) 9/08/00 DKK 39,573,415 5,186,631 (166,808) 3/03/00 EUR 168,734,389 162,460,242 (9,033,807) 9/08/00 EUR 63,885,001 62,342,036 (2,320,461) 3/03/00 GBP 80,183,447 126,581,141 (2,119,251) 9/08/00 GBP 25,030,522 39,519,995 (759,620) 4/07/00 HKD 135,703,776 17,435,092 27,478 4/07/00 JPY 1,908,598,894 17,479,052 (1,095,762) 3/03/00 NOK 349,547,051 41,669,969 (2,076,928) 9/08/00 NOK 169,722,980 20,268,388 (420,631) 4/07/00 NZD 17,230,928 8,369,820 (571,348) 3/03/00 SEK 603,635,176 68,856,842 (2,697,631) 9/08/00 SEK 276,684,183 31,878,200 (566,336) 4/07/00 SGD 6,089,030 3,544,441 (73,256) ------------------- $ (25,279,084) ------------------- -------------------
32 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- Forward Currency Contracts - Continued
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ------------------ ------------------------- ---------------------- ------------------- ------------------- Sales 4/07/00 AUD 14,122,953 $ 8,676,973 $ 563,593 4/07/00 CAD 11,609,512 8,008,276 (98,049) 3/03/00 CHF 49,230,097 29,510,643 2,380,951 9/08/00 CHF 23,150,416 14,147,667 401,358 3/03/00 DKK 89,637,714 11,621,598 822,976 9/08/00 DKK 43,687,349 5,725,817 137,934 3/03/00 EUR 168,734,389 162,460,242 9,624,751 9/08/00 EUR 102,396,982 99,923,867 2,230,167 3/03/00 GBP 80,183,447 126,581,141 2,323,031 9/08/00 GBP 38,717,036 61,129,253 797,770 4/07/00 HKD 204,818,629 26,314,903 (40,306) 4/07/00 JPY 5,851,483,555 53,588,204 389,666 3/03/00 NOK 349,547,051 41,669,969 1,974,826 9/08/00 NOK 179,824,071 21,474,665 505,678 4/07/00 NZD 15,729,885 7,640,697 484,138 3/03/00 SEK 603,635,176 68,856,842 3,308,619 9/08/00 SEK 297,066,194 34,226,516 387,967 4/07/00 SGD 6,185,244 3,600,447 96,872 ------------------- $ 26,291,942 ------------------- -------------------
Currency Abbreviations: AUD Australian Dollar HKD Hong Kong Dollar CAD Canadian Dollar JPY Japanese Yen CHF Swiss Franc NOK Norwegian Kroner DKK Danish Krona NZD New Zealand Dollar EUR Euro SEK Swedish Krona GBP British Pound SGD Singapore Dollar 33 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) ------------------ ------------------------- --------------------- ------------------- ------------------- Buys 15 DAX March 2000 $ 2,775,609 $ 228,363 41 TSE TOPIX March 2000 6,452,961 345,151 ------------------- $ 573,514 ------------------- ------------------- Sales 25 ALL ORDS March 2000 $ 1,203,734 $ (8,447) 16 IBEX 35 March 2000 1,935,359 (2,419) 6 MIB 30 March 2000 1,436,038 (221,432) 38 NEW FTSE 100 March 2000 3,749,292 (12,078) ------------------- $ (244,376) ------------------- -------------------
At February 29, 2000, the Fund has cash and/or securities to cover any margin requirements on open futures contracts. 34 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) Federal Tax Information - (Unaudited) February 29, 2000 - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all the Fund's distributions are from investment company taxable income. 35 GMO CURRENCY HEDGED INTERNATIONAL CORE FUND (A Series of GMO Trust) PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham and Mr. Darnell have been portfolio managers at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. Mr. Berkley has been with GMO and involved in portfolio management for more than ten years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Currency Hedged International Core Fund returned 15.9% for the fiscal year ended February 29, 2000 as compared to 34.3% for the MSCI EAFE Hedged Index. The Fund's disappointing performance comes from stock selection that emphasized value stocks (those companies that are cheaper on price-to-book, price-to-earnings and other measures) and smaller capitalization stocks. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in common stocks throughout the period. In international markets, the fiscal year was characterized by explosive performance of the technology and telecommunications sectors. This effect was particularly strong in the fourth quarter of 1999, during which period the (unhedged) MSCI EAFE Growth Index returned 25.6% versus 8.9% for MSCI EAFE Value. While this paralleled the run-up in the U.S. NASDAQ Index, the EAFE Index contains relatively few pure Internet and information technology stocks. The international rally focused more on the best available approximations, which are telecommunications stocks. Both fixed line and wireless companies performed very strongly in the markets, as did the related equipment providers. The optimism about these companies came despite the failure of many other growth stocks, such as pharmaceuticals and established software companies, to produce continued strong earnings growth. In contrast, many neglected stocks - typically smaller capitalization, value companies - had lackluster market performance for the fiscal year. Throughout the bull market of the late 1990's, growth stocks have enjoyed increasing "multiple expansion" to higher relative levels of price-to-book and price-to-earnings. As a result the spread, or discount, between the valuations of the cheaper stocks on such measures and the most expensive stocks has reached levels unprecedented in history. These wide gaps are considerably beyond what could possibly be justified by the relatively modest differences in consensus growth rate estimates. This is true even if no regression of the higher profitability of telecommunications stocks took place in the next 20 years, which would be contrary to the entire history of corporate competition. The fiscal year was marked by strong performance in the Asian markets. Japan rose by 42% in local currency, while Hong Kong and Singapore returned +66% and +59%, respectively. These markets benefited both from the dissipation of the crisis mentality and from the underlying recovery in the economic fundamentals of the region. The only two countries that had higher returns than all the Asian markets were Finland and Sweden (dominated by the returns of Nokia and Ericsson, respectively). The major European markets showed mixed returns, with Germany and France leading the way, both with gains of 56% in Euro. The United Kingdom and Switzerland were the worst performing major markets, with slightly negative returns in local currency. Currency hedging was a successful strategy for the fiscal year, as the MSCI EAFE Hedged benchmark (which returned 34.3%) outperformed MSCI EAFE by nearly 10%. The weakness of the Euro was the driving factor behind the higher hedged returns, which came despite strengthening of the yen against the dollar. EFFECT OF COUNTRY ALLOCATION The Fund was successful in country allocation largely due to the overweighting of the South East Asian markets. The Fund was also neutral weighted in Japan. Although this decision did not add to relative return, it represented the first time in the Fund's history that it was not underweight in Japan. The Fund was generally underweight in Europe. It suffered from being overweight in Austria, but benefited from underweights in the United Kingdom and Switzerland. EFFECT OF STOCK SELECTION The poor performance in the fiscal year was entirely a result of stock selection, and in particular of the Fund's tilt towards value. Because of the opportunities represented by the wide dispersion in price-to-book ratios, the Fund is heavily concentrated in the cheaper stocks based on price-to-book. Half of the Fund is invested in stocks within the cheapest 25% of the EAFE universe; only 10% of the Fund is invested outside the cheapest 50% of the universe. In local currency, those groups underperformed EAFE by -14.5% and -9.3% respectively, for the fiscal year. The Fund was further hurt by its emphasis on smaller capitalization stocks, which underperformed significantly even after accounting for their overlap with value. Small cap stocks within EAFE underperformed by -17%, and small value stocks underperformed by -30%. Value stocks did very poorly whether defined on the basis of book, earnings, sales or dividend yield, which shows that the Fund's underperformance is not a consequence of focussing on price-to-book as a valuation measure. The Fund's more sophisticated value models, which make further adjustments to credit companies for growth and financial quality, fared equally poorly. In this overheated environment, reasonable adjustments did not suffice to make the most expensive price-to-book stocks look attractive. Much of the size and value underperformance was driven by telecommunications and technology stocks. Of that, over 7% of negative attribution was due to just five large capitalization stocks that doubled or tripled in price from expensive starting levels. PORTFOLIO STRUCTURE AND OUTLOOK Based on a careful analysis of current company fundamentals and valuation, GMO has decided to retain its substantial overweights in value stocks and small companies, in order to benefit from the inevitable rebound. While the growth oriented bull market of the last few years has been a difficult period for the Currency Hedged International Core Fund, it leaves us at a moment of great opportunity. For value investors it is always darkest before the dawn. Markets overshoot fair value, and it is difficult to call the turning points. Yet the greater the overshoot past fair value, the more certain is the eventual rebound, and greater is the reward to those that participate. Furthermore, globalization and monetary union have not eliminated the significance of country selection. This is apparent in the wide spread of returns during the last fiscal year and also in a wide spread in valuations between countries, even when adjusted for industry composition. To take advantage of these opportunities, the Fund remains underweight in Europe and particularly in favor of Asia ex-Japan. Despite the strong performance of Asia in 1999, those markets still are attractively valued relative to the rest of EAFE. Even within Europe there are attractive opportunities to favor cheaper markets such as Austria over more expensive ones such as the United Kingdom and Spain. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. Currency Hedged Int'l Core Fund-III As of 2/29/00 COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO CURRENCY HEDGED INTERNATIONAL CORE FUND CLASS III SHARES AND THE MSCI EAFE HEDGED INDEX AS OF FEBRUARY 29, 2000
- -------------------------------------------------------------------------------- Average Annual Total Return - -------------------------------------------------------------------------------- 1yr Since Inception - -------------------------------------------------------------------------------- 6/30/95 Class III 15.16% 13.59% - -------------------------------------------------------------------------------- 1/9/98 Class IV 15.24% 10.62% - --------------------------------------------------------------------------------
Date Currency Hedged Int'l Core Fund-III MSCI EAFE GMO EAFE Hedged ---- ----------------------------------- --------- --------------- 6/30/95 9940 10000 10000 9/30/95 10666 10417 11175 12/31/95 11235 10838 11992 3/31/96 11767 11151 12716 6/30/96 12229 11327 13193 9/30/96 12326 11314 13289 12/31/96 12952 11494 13648 3/31/97 13399 11314 14309 6/30/97 14528 12782 16075 9/30/97 15347 12692 16539 12/31/97 14622 11697 15758 3/31/98 17164 13418 18411 6/30/98 17070 13560 18739 9/30/98 13777 11631 15346 12/31/98 15687 14034 17916 3/31/99 16126 14229 19287 6/30/99 18083 14590 20500 9/30/99 18040 15231 20366 12/31/99 18967 17818 24451 2/29/00 18136 17135 24695
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period. Past performance is not indicative of future performance. Information is unaudited. - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of GMO Trust and the Shareholders of GMO Evolving Countries Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Evolving Countries Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 18, 2000 GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS - 83.2% BRAZIL - 5.4% 1,168,133 Cia Saneamento Basico SAO PA * 115,856 6,032,000 Companhia Siderurgica Nacional SA 184,420 49,609,000 Electrobras 860,413 10,331 Investimentos Itau SA 8,816 130,023 Souza Cruz (Registered) 782,563 17,000,000 Telecomunicacoes Brasileiras SA 1,497,768 1,128 Telesp Celular Participacoes SA 13 3,800 Vale Do Rio Doce 87,618 ----------------- 3,537,467 ----------------- CHILE - 1.3% 8,000 Banco Santander ADR 118,500 7,300 Banco Santiago ADR 146,000 7,400 Compania Cervecerias ADR 190,550 8,600 Compania de Telefones de Chile ADR 172,000 13,200 Gener SA ADR 204,600 ----------------- 831,650 ----------------- CHINA - 6.3% 100,000 China Everbright Technology * 14,648 348,000 China Merchants Holdings Co Ltd 215,745 1,227,000 China Overseas Land & Investment Ltd * 160,808 188,000 China Resources Enterprise 242,766 260,600 China Telecom Ltd * 2,402,484 2,600 China Telecom (Hong Kong) Ltd ADR * 483,275 943,000 Citic Ka Wah Bank Ltd 290,795 237,000 Cosco Pacific Ltd 135,510 102,000 Shanghai Industrial Holdings 192,000 1,708 SIIC Medical Science and Technology (Group) Ltd * 404 ----------------- 4,138,435 ----------------- CZECH REPUBLIC - 4.0% 18,910 Ceska Sporitelna * 107,886 426,579 Ceske Energeticke Zavody AS * 1,420,064 4,880 Ceske Radiokomunikace * 298,227 5,775 Komercni Banka AS * 143,795 1,110 Severoceske Doly 17,574 13,630 SPT Telecom AS * 285,744 842 Tabak AS 159,519 99,500 Unipetrol * 178,138 ----------------- 2,610,947 ----------------- INDIA - 0.0% 100 Castrol India 699 100 Satyam Computer Service 11,536 100 Satyam Computer Service (New Shares) 11,536 ----------------- 23,771 ----------------- See accompanying notes to the financial statements. 1 GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- INDONESIA - 4.6% 487,000 Astra International * 241,040 4,618,400 Bank Internasional Indonesia * 62,201 147,576,000 Bank Internasional Indonesia (Entitlement Letters) (a) (c)* - 354,000 Gajah Tunggal Tbk * 40,525 552,100 Gudang Garam 920,167 9,000 Gulf Resources Ltd ADR * 63,000 162,900 HM Sampoerna * 269,306 580,900 Indah Kiat Pulp & Paper * 160,383 641,000 Matahari Putra Prima Tbk * 86,330 340,600 PT Indofood Sukses Makmur Tbk * 282,113 79,000 PT Indosat (Persero) Tbk 142,572 562,000 PT Lippo Bank Tbk * 15,138 1,407,000 PT Pabrik Kertas Tjiwi Kimia * 331,616 63,000 Semen Gresik 71,273 306,000 Tambang Timah Persero (Foreign Registered) 142,182 397,112 Telekomunikasi Indonesia 195,213 ----------------- 3,023,059 ----------------- ISRAEL - 1.1% 120,000 Bank Leumi Le-Israel * 263,410 536 Clal Electronics Industries Ltd * 141,638 22,140 Clal Industries Ltd * 283,495 ----------------- 688,543 ----------------- KOREA - 11.3% 10,152 Cheil Jedang Corp 654,299 47,000 Daewoo Heavy Industries 26,801 7,200 Daewoo Securities 75,749 14,084 Hana Bank 102,103 355 Housing & Commercial Bank 6,324 8,900 Hyundai Electronics Industries * 140,845 12,518 Hyundai Heavy Industries 348,612 12,416 Hyundai Merchant Marine 85,620 6,910 Keum Kang Ltd 317,672 34,947 Kookmin Bank 389,294 5,400 Korea Chemical 336,574 10,300 Korea Telecommunications ADR 448,050 33,600 Korean Air Lines 230,217 8,200 LG Electronics Co 168,552 814 LG Information & Communication 90,316 6,620 Pohang Iron & Steel (c) 681,940 5,324 Samsung Electronics 1,204,966 2,564 Samsung Electronics GDR 144A (1/2 Voting) 335,564 1,614 Samsung Electronics GDS 144A (Non Voting) 108,098 3,300 Samsung Heavy Industries * 12,020 10,208 Samsung Securities 312,258 24,936 SK Corp 562,165 7,400 SK Telecom ADR 332,538 19,030 Ssangyong Oil Refining 317,978 ----------------- 7,288,555 ----------------- 2 See accompanying notes to the financial statements. GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- MALAYSIA - 10.0% 41,000 British American Tobacco Berhad 302,105 63,000 Edaran Otomobil Berhad 265,263 467,000 Hicom Holdings Berhad 415,384 323,000 Magnum Corp Berhad 283,900 100,000 Malakoff Berhad 271,053 258,000 Malayan Banking Berhad 1,161,000 22,000 Malaysian Pacific Industries 279,342 77,000 Nestle Malaysia 397,158 250,000 Oriental Holdings Berhad 588,816 123,000 Resorts World Berhad 446,684 422,000 Sime Darby Berhad 566,368 1,077,000 Tan Chong International Ltd 163,291 201,000 Tanjong 505,145 170,000 Technology Resources Industries 243,816 90,000 United Engineers * 248,684 219,800 YTL Corp 404,895 ----------------- 6,542,904 ----------------- MEXICO - 6.6% 35,500 Carso Global Telecom Class A * 443,371 5,300 Cemex SA de CV ADR (Participating Certificates) * 113,288 17,061 Cemex SA de CV CPO 73,759 43,000 Empresas La Moderna SA de CV Class A * 252,455 1,000 Fomento Economico Mexicano SA 44,438 192,803 Grupo Carso SA de CV Class A * 751,207 53,000 Grupo Financiero Inbursa SA * 244,972 41,000 Grupo Mexico Class B 203,512 1,350 Grupo Televisa SA GDR * 103,697 102,240 Grupo Televisa SA (Participating Certificates) * 392,895 18,200 Telefonos de Mexico Class L ADR 1,196,650 198,062 Wal-Mart de Mexico SA de CV * 473,590 ----------------- 4,293,834 ----------------- PAKISTAN - 0.6% 93,312 Pakistan State Oil 419,360 ----------------- POLAND - 0.2% 3,500 Agora SA GDR 144A * 121,188 ----------------- RUSSIA - 6.3% 103,000 Irkutskenergo ADR 337,160 20,400 Lukoil Holding Co ADR 851,700 156,000 Norilsk Nickel (Registered) * 1,332,240 42,000 Surgutneftegaz ADR 481,182 11,000 Unified Energy Systems ADR 158,125 64,500 Unified Energy Systems GDR * 927,188 ----------------- 4,087,595 ----------------- See accompanying notes to the financial statements. 3 GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- SOUTH AFRICA - 8.1% 60,340 Amalgamated Bank of South Africa 233,002 8,200 Anglo American Platinum Corp 232,635 6,400 Anglo Gold Ltd 331,868 64,100 Comparex Holding Ltd 447,054 17,700 De Beers Centenary Link Units 387,772 6,500 De Beers Consolidated Mines Ltd ADR 149,094 54,934 Dimension Data Holdings * 510,837 1,000 Impala Platinum Holdings Ltd 35,620 4,610 Investec Group Ltd 191,820 7,599 Liberty International Plc 49,225 68,200 Liberty Life Association of Africa Ltd 664,296 24,453 Nedcor Ltd 516,447 42,700 Rembrandt Group Ltd 370,151 19,100 Sappi Ltd 158,045 69,100 Sasol Ltd 442,174 145,729 Standard Bank Investment Corp 567,325 ----------------- 5,287,365 ----------------- TAIWAN - 3.9% 9,000 Acer Inc * 24,455 114,000 China Development Industrial Bank Inc * 192,906 148,000 China Steel Corp 114,624 22,080 China Steel Corp GDR 361,560 44,200 China Trust Commercial Bank * 47,465 189,000 Formosa Chemicals & Fibre Co 282,916 3,500 GigaMedia Ltd * 245,219 7,000 Hon Hai Precision Industry Co Ltd * 65,148 32,000 Legend Holdings Ltd * 148,019 65,000 Nan Ya Plastic Corp 143,833 80,000 Taiwan Semiconductor * 523,267 20,000 Tatung Co * 27,856 101,000 United Microelectronics * 369,753 ----------------- 2,547,021 ----------------- THAILAND - 6.1% 44,700 Advanced Info Service Public Co Ltd (Foreign Registered) * 694,278 149,500 Bangkok Bank Pcl (Foreign Registered) * 241,224 18,800 BEC World Public Co Ltd (Foreign Registered) 141,068 71,000 CP Feedmill Public Co Ltd (Foreign Registered) * 257,064 21,045 Delta Electronics Public Co Ltd (Foreign Registered) 241,839 387,231 Krung Thai Bank Public Co Ltd (Foreign Registered)* 134,614 49,700 PTT Exploration and Production Public Co Ltd (Foreign Registered) * 241,230 66,336 Shinawatra Computer Public Co Ltd (Foreign Registered) * 525,606 8,000 Siam Cement Pcl (Foreign Registered) * 144,405 31,300 Siam City Cement (Foreign Registered) * 105,113 181,200 Siam Commercial Bank Pcl (Foreign Registered) * 144,998 369,000 Telecomasia Corp Public Co Ltd (Foreign Registered) * 513,105 321,774 Thai Farmers Bank Pcl (Foreign Registered) * 303,919 324,600 Thai Petrochemical (Foreign Registered) * 85,163 263,200 United Broadcasting Pcl (Foreign Registered) * 231,332 ----------------- 4,004,958 ----------------- 4 See accompanying notes to the financial statements. GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares/ Par Value ($) Description Value ($) - ----------------------------------------------------------------------------------------------------------- TURKEY - 3.0% 1,692,000 Arcelik 100,084 3,450,000 Dogan Sirketler Grubu Holdings * 102,035 4,609,000 Eregli Demir VE Celik Fabrik * 198,456 5,505,000 Ford Otomotive Sanayii AS * 263,374 1,606,000 KOC Holding AS 307,342 1,921,000 Petkim Petrokimya Holding 81,880 5,767,000 Sabanci Holding 265,876 9,410,000 TAT Konserve * 188,265 15,986,000 Tofas Turk Otomobil Fabrik * 200,242 5,256,000 Turkiye IS Bankasi 251,461 ----------------- 1,959,015 ----------------- VENEZUELA - 4.4% 81,224 Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR 2,705,775 109,300 Siderurgica Venezolana (Sivensa) Class A ADR (Registered) * 163,950 ----------------- 2,869,725 ----------------- TOTAL COMMON STOCKS (Cost $49,323,419) 54,275,392 ----------------- PREFERRED STOCKS - 8.5% BRAZIL - 8.4% 30,000 Aracruz Celulose SA Class B 62,560 35,498,950 Banco Bradesco SA 254,983 3,415,465 Banco Bradesco SA * 24,533 9,322,000 Banco do Brasil SA 55,842 10,288 Companhia Vale do Rio Doce 273,261 27,506,000 Electrobras Class B (Registered) 502,865 44,000 Investimentos Itau SA 40,780 1,273 Investimentos Itau SA * 1,180 3,737,000 Itaubanco SA (Registered) 296,721 2,383,000 Petroleo Brasileiro SA (Petrobras) 619,486 19,642 Telecomunicacoes Brasileiras SA ADR 2,892,285 3,177,000 Telecomunicacoes Brasileiras SA Receipts 465,912 3,177,000 Telecomunicacoes Brasileiras SA (Registered) * 126 182 Telesp Celular Participacoes SA 4 ----------------- 5,490,538 ----------------- KOREA - 0.1% 2,647 Shinsegae Department Store * 91,267 ----------------- TOTAL PREFERRED STOCKS (Cost $3,992,498) 5,581,805 ----------------- DEBT OBLIGATIONS - 2.0% U.S. GOVERNMENT - 2.0% $ 1,067,571 U.S. Treasury Inflation Indexed Note, 3.375% due 1/15/07 (b) 1,009,856 $ 307,866 U.S. Treasury Inflation Indexed Note, 3.875% due 1/15/09 (b) 298,053 ----------------- 1,307,909 ----------------- TOTAL DEBT OBLIGATIONS (Cost $1,338,187) 1,307,909 ----------------- See accompanying notes to the financial statements. 5 GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares/ Par Value ($) Description Value ($) - ----------------------------------------------------------------------------------------------------------- INVESTMENT FUNDS - 0.9% TAIWAN - 0.5% 34,900 R.O.C. Taiwan Fund 320,644 ----------------- UNITED STATES - 0.4% 15,000 Morgan Stanley Emerging Markets Fund 247,500 ----------------- TOTAL INVESTMENT FUNDS (Cost $467,617) 568,144 ----------------- RIGHTS & WARRANTS - 0.1% BRAZIL - 0.0% 900,061 Tele Leste Celular Participacoes SA Preferred Rights 3/23/00 * - 4,816,191 Tele Leste Celular Participacoes SA Rights 3/23/00 * - ----------------- - ----------------- INDONESIA - 0.0% 57,050 Bank Internasional Indonesia Warrants 4/16/02 * 446 ----------------- MALAYSIA - 0.1% 27,800 United Engineers Warrants 11/18/02 * 38,042 ----------------- TOTAL RIGHTS & WARRANTS (Cost $333) 38,488 ----------------- SHORT-TERM INVESTMENTS - 1.4% CASH EQUIVALENTS - 1.4% $ 900,000 Banque Nationale Paribas (London) Time Deposit, 5.81% due 3/01/00 900,000 ----------------- TOTAL SHORT-TERM INVESTMENTS (Cost $900,000) 900,000 ----------------- TOTAL INVESTMENTS - 96.1% (Cost $56,022,054) 62,671,738 Other Assets and Liabilities (net) - 3.9% 2,528,929 ----------------- TOTAL NET ASSETS - 100.0% $ 65,200,667 ----------------- -----------------
6 See accompanying notes to the financial statements. GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 - -------------------------------------------------------------------------------- NOTES TO THE SCHEDULE OF INVESTMENTS: ADR American Depositary Receipt GDR Global Depository Receipt GDS Global Depository Shares (a) Security is restricted as to public resale. (b) All or a portion of this security is held as collateral for open swaps (Note 6). (c) Valued by management (Note 1). 144A Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. * Non-income producing security. See accompanying notes to the financial statements. 7 GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 - -------------------------------------------------------------------------------- At February 29, 2000, industry sector diversification of the Fund's equity investments was as follows: INDUSTRY SECTOR (UNAUDITED) Telecommunications 21.1 % Banking 8.8 Utilities 7.6 Electronic Equipment 6.9 Metals and Mining 6.4 Consumer Goods 6.1 Financial Services 5.3 Communications 5.2 Energy Services 5.2 Food and Beverage 4.7 Conglomerates 4.7 Construction 2.9 Automotive 2.4 Paper and Allied Products 1.6 Chemicals 1.4 Services 1.2 Insurance 1.1 Real Estate 0.7 Machinery 0.7 Transportation 0.5 Computers 0.4 Health Care 0.4 Retail Trade 0.1 Miscellaneous 4.6 ------------ 100.0 % ------------ ------------
8 See accompanying notes to the financial statements. GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) STATEMENT OF ASSETS AND LIABILITIES - FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $56,022,054) (Note 1) $ 62,671,738 Foreign currency, at value (cost $2,303,808) (Note 1) 2,277,169 Cash 212,499 Dividends and interest receivable 294,966 Receivable for open swap contracts (Notes 1 and 6) 299,613 Receivable for expenses waived or borne by Manager (Note 2) 8,442 ------------------- Total assets 65,764,427 ------------------- LIABILITIES: Payable for investments purchased 390,000 Accrued capital gain and repatriation taxes payable (Note 1) 59,998 Payable to affiliate for (Note 2): Management fee 35,116 Shareholder service fee 8,030 Accrued expenses 80,412 ------------------- Total liabilities 573,556 ------------------- NET ASSETS $ 65,190,871 ------------------- ------------------- NET ASSETS CONSIST OF: Paid-in capital $ 58,258,811 Accumulated undistributed net investment income 29,179 Accumulated net realized gain 38,097 Net unrealized appreciation 6,864,784 ------------------- $ 65,190,871 ------------------- ------------------- NET ASSETS ATTRIBUTABLE TO CLASS III SHARES $ 65,190,871 ------------------- ------------------- SHARES OUTSTANDING - CLASS III 5,714,403 ------------------- ------------------- NET ASSET VALUE PER SHARE - CLASS III $ 11.41 ------------------- -------------------
See accompanying notes to the financial statements. 9 GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) STATEMENT OF OPERATIONS - FEBRUARY 29, 2000 - --------------------------------------------------------------------------------
INVESTMENT INCOME: Dividends (net of foreign tax expense of $114,259) $ 802,945 Interest 141,003 ----------------- Total income 943,948 ----------------- EXPENSES: Management fee (Note 2) 336,947 Custodian fees 229,093 Audit fees 56,147 Transfer agent fees 28,168 Registration fees 2,018 Legal fees 1,096 Trustees fees (Note 2) 564 Miscellaneous 18,040 Fees waived or borne by Manager (Note 2) (86,122) ----------------- 585,951 Shareholder service fee - Class III (Note 2) 77,765 ----------------- Net expenses 663,716 ----------------- Net investment income 280,232 ----------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 13,281,649 Closed swap contracts 1,416,249 Foreign currency, forward contracts and foreign currency related transactions (284,304) ----------------- Net realized gain 14,413,594 ----------------- Change in net unrealized appreciation (depreciation) on: Investments (Note 1) 15,616,727 Open swap contracts (185,353) Foreign currency, forward contracts and foreign currency related transactions (38,728) ----------------- Net unrealized gain 15,392,646 ----------------- Net realized and unrealized gain 29,806,240 ----------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 30,086,472 =================
10 See accompanying notes to the financial statements. GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 -------------------- -------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 280,232 $ 1,569,067 Net realized gain (loss) 14,413,594 (13,606,696) Change in net unrealized appreciation (depreciation) 15,392,646 (7,524,498) -------------------- -------------------- Net increase (decrease) in net assets resulting from operations 30,086,472 (19,562,127) -------------------- -------------------- Distributions to shareholders from: Net investment income - Class III - (1,117,606) Net realized gains - Class III (56,869) - -------------------- -------------------- (56,869) (1,117,606) -------------------- -------------------- Net share transactions - Class III (Note 5) 3,442,979 12,699,670 -------------------- -------------------- Total increase (decrease) in net assets 33,472,582 (7,980,063) NET ASSETS: Beginning of period 31,718,289 39,698,352 -------------------- -------------------- End of period (including accumulated undistributed net investment income of $29,179 and distributions in excess of net investment income of $41,489, respectively) $ 65,190,871 $ 31,718,289 ==================== ====================
See accompanying notes to the financial statements. 11 GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Financial Highlights (For a Class III share outstanding throughout each period) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------------------------------ 2000 1999 1998* ------------------ ------------------- ------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 5.74 $ 8.61 $ 10.00 ------------------ ------------------- ------------------------- Income from investment operations: Net investment income 0.05 0.23 0.03 + Net realized and unrealized gain (loss) 5.63 (2.94) (1.42) ------------------ ------------------- ------------------------- Total from investment operations 5.68 (2.71) (1.39) ------------------ ------------------- ------------------------- Less distributions to shareholders: From net investment income - (0.16) - From net realized gains (0.01) - - ------------------ ------------------- ------------------------- Total distributions (0.01) (0.16) - ------------------ ------------------- ------------------------- NET ASSET VALUE, END OF PERIOD $ 11.41 $ 5.74 $ 8.61 ------------------ ------------------- ------------------------- ------------------ ------------------- ------------------------- TOTAL RETURN (a) 98.96% (31.60%) (13.90%)*** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 65,191 $ 31,718 $ 39,698 Net expenses to average daily net assets 1.28% 1.27% 1.65% ** (b) Net investment income to average daily net assets 0.54% 3.65% 0.78% ** Portfolio turnover rate 157% 158% 56% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.02 $ 0.03
+ Computed using average shares outstanding throughout the period. * Period from August 29, 1997 (commencement of operations) to February 28, 1998. ** Annualized *** Not annualized. (a) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Includes stamp duties and transfer taxes not waived or borne by the manager, which approximate .16% of average daily net assets. 12 See accompanying notes to the financial statements. GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Notes to Financial Statements February 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Evolving Countries Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities traded in the securities markets of developing countries of Asia, Latin America, the Middle East, Africa and Europe ("Emerging Markets"). The Fund's benchmark is the IFC Investable Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, 13 GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. There were no forward foreign currency contracts outstanding as of February 29, 2000. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 29, 2000, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premuims paid for purchasing options which expire are treated as realized losses. Premiums paid 14 GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. FUTURES CONTRACTS The Fund may purchase or sell index futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 29, 2000, there were no outstanding futures contracts. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into swap agreements to manage its exposure to the equity markets. The Fund enters into total return swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, 15 GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or that there may be unfavorable changes in the price of the security or index underlying these transactions. See Note 6 for a summary of the open swap agreements as of February 29, 2000. TAXES The 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"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund has recorded a deferred tax liability in respect of unrealized appreciation on foreign securities of $59,998 for potential capital gains and repatriation taxes at February 29, 2000. The accrual for capital gains and repatriation taxes is included in net unrealized gain in the Statement of Operations. The Fund has incurred $44,959 related to repatriation taxes which is included in net realized gain in the Statement of Operations. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to foreign currency transactions and foreign taxes. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights table excludes these adjustments. 16 GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - --------------------------------------------------------------------------------
Accumulated Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital --------------------------- -------------------------- -------------------------- $(209,564) $210,900 $(1,336)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is 1.60% of the amount invested. In the case of cash redemptions, the fee is .40% of the amount redeemed. The fees will be reduced by 50% with respect to any portion of a purchase or redemption that is offset by a corresponding redemption or purchase, respectively, occurring on the same day. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $145,161 in purchase premiums and $22,763 in redemption fees. There is no premium for reinvested distributions. While no purchase premium is normally charged with respect to in-kind purchases of Fund shares, a purchase premium of up to .20% may be charged on certain in-kind purchases. INVESTMENT RISK Investments in securities of emerging countries present certain risks that are not inherent in many other investments. Many emerging countries present elements of political and/or economic instability. The securities markets of emerging countries are generally smaller and less developed than the securities markets of the U.S. and developed foreign markets. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it 17 GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- receives. The Fund may acquire interests in securities in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging countries are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .65% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding custody fees, brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .80% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding custody fees, brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceeded .65% of average daily net assets. The Manager has entered into a Consulting Agreement with Dancing Elephant, Ltd. (the "Consultant") with respect to the management of the portfolio. 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. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000, was $564. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, were as follows:
Purchases Proceeds ------------------- ------------------------ U.S. Government securities $ 800,128 $ 1,756,813 Investments (non-U.S. Government securities) 75,922,876 72,564,734
18 GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- At February 29, 2000, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation ---------------------------- -------------------------- ------------------------- ------------------------- $56,659,413 $11,952,394 $5,940,069 $6,012,325
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 62% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's outstanding shares. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 --------------------------------------- --------------------------------------- Class III: Shares Amount Shares Amount ------------------ ------------------ ------------------ ------------------ Shares sold 905,894 $ 9,227,832 3,158,638 $ 26,166,632 Shares issued to shareholders in reinvestment of distributions 4,836 54,017 134,305 804,354 Shares repurchased (723,935) (5,838,870) (2,378,020) (14,271,316) ------------------ ------------------ ------------------ ------------------ Net increase 186,795 $ 3,442,979 914,923 $ 12,699,670 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
19 GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: SWAP AGREEMENTS
Net Notional Expiration Unrealized Amount Date Description Appreciation -------------------- ------------------- ---------------------------------------------- ------------------------------- TOTAL RETURN SWAPS $ 630,443 3/31/00 Agreement with Credit Agricole Indosuez (W.I. $ 151,065 Carr) dated 3/16/99 to receive (pay) the notional amount multiplied by the return on the MSCI Taiwan Index and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. 620,216 3/31/00 Agreement with Credit Agricole Indosuez (W.I. 148,548 Carr) dated 3/17/99 to receive (pay) the notional amount multiplied by the return on the MSCI Taiwan Index and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. ----------------- $ 299,613 ----------------- -----------------
20 GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) Federal Tax Information - (Unaudited) February 29, 2000 - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all of the Fund's distributions are from net capital gain dividends. The Fund has elected to defer to March 1, 2000 post-October currency losses of $17,894. 21 GMO EVOLVING COUNTRIES FUND (A Series of GMO Trust) PORTFOLIO MANAGERS Mr. R. Jeremy Grantham and Mr. Arjun Divecha are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham has been with GMO since its founding in 1977. Mr. Divecha is the principal of Dancing Elephant Ltd., which serves as consultant to the Fund. Dancing Elephant Ltd. has an exclusive consulting management agreement with GMO. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Evolving Countries Fund returned 99.0% for the fiscal year ended February 29, 2000. The Fund's benchmark, the IFC Investable Composite, returned 67.9% during the same period. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in equity securities throughout the period. After a difficult 1998, emerging markets returned an impressive 67.9% for the fiscal year, outperforming the S&P 500 by 56.2%. Strong macroeconomic numbers (huge trade surpluses, lower than expected inflation) from Asia completely changed sentiment in emerging markets. There were huge divergences in market returns, ranging from China gaining 200% to Philippines losing 15% (in U.S. dollars) of its value. Our outperformance of 31% came mainly from country selection, which added 20%, while our stock selection models added 11%. Of our four country selection models, the value and momentum models outperformed strongly, while macroeconomic models slightly underperformed. Most of our outperformance in country selection came from overweighting Brazil, Indonesia and Korea and underweighting Greece. We began the year moderately overweight in Brazil (+2%) and heavily overweight Korea (+7%). We have gradually increased our weighting in Brazil. Brazil rose 120% during the fiscal year while Korea climbed 91%. Our 6% average underweight in Greece added significant value as the market rose approximately 26%, underperforming the benchmark by 40%. After being overweight in Korea over the last 2 years, we have been reducing our position there and are now underweight by 3%. Our other significant positions - an overweight in Thailand (+6%) and an underweight in Mexico (-5%) - hurt performance. Thailand rose only 22% while Mexico gained 77% for the period. Stock selection added 11% to performance despite a difficult year for value stocks. Overall, value stocks underperformed the Index by 7% as the technology and telecommunications mania in developed markets spilled over to emerging markets. The Indonesian bank recapitalization process led to one of our holdings quintupling in value, contributing significantly to stock selection. OUTLOOK The first leg of the current emerging markets rally (the IFC Investable Composite has risen 106% since September 1998) has been centered around liquidity and confidence. Investors soon realized that, though they suffered huge losses during the crisis in 1998, Asian and other emerging economies would not continue their free fall but would in fact resume rapid growth. We believe the rally thus far has been fueled less by earnings growth or corporate restructuring than it has by revaluing markets and currencies that were priced for destruction. Empirical research shows that markets after a collapse tend to have a stronger second year than the first year. This holds true for both developed and emerging markets. We have long argued that it takes an economy four to ten quarters to realize the full benefits of currency devaluation as it takes exporters this long to increase capacity and procure orders. During this period, the premium price of imports forces a resumption of local spending, which inevitably benefits local producers. We have seen this pattern in India (1993), Mexico (1994) and Thailand (1998) and are now starting to see the same effect in Brazil and Russia. In the coming year we expect to see most emerging economies grow strongly and corporate earnings increase sharply in tandem. Additionally, most emerging countries with undervalued currencies are running large and increasing trade surpluses. For a few large markets, notably Brazil, Indonesia, Turkey and Russia, we are likely to see significant decreases in both nominal and real interest rates as a result of falling inflation. The corporate restructuring in Korea and India and the resulting benefits have set a pattern for other countries to follow. In an environment of global growth, each of these factors supports our continued enthusiasm for this asset class. Within Asia, we prefer countries that are likely to have economic growth that will surprise on the upside. These markets, including Indonesia, Malaysia and Thailand, have not participated in the recent rally. Indonesia, trading at under five times peak earnings, could be the most explosive market over the next 5 years. On the other hand, we have been reducing our position in Korea as its double-digit GDP growth and 25% rise in industrial production may soon force interest rate hikes to cool the economy. India's technology boom mirrors the Internet hysteria in the U.S., and we continue to reduce our position there, though parabolic moves in some of these stocks have kept us overweight. We are cautiously reducing our underweight in Turkey, anticipating it may take several months to see whether the IMF program will be successful. In Latin America we are positive about Brazil. The government response to the January 1999 currency crisis has led to an improved trade balance and controlled inflation. Earnings growth is likely to be strong in 2000, exceeding current expectations. Though the Mexican economy has benefited from solid policymaking and robust exports to the U.S., the peso is the most overvalued of all emerging currencies. Because the stock market is also expensive, we are underweight by 5.2% relative to the benchmark in Mexico. The technology and telecommunications mania has continued to make value investing a challenge in the short term. Nevertheless, we are confident that our emphasis on buying cheap countries and companies will continue to produce excellent long-term returns. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. - -------------------------------------------------------------------------------- COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO EVOLVING COUNTRIES FUND CLASS III SHARES AND THE IFC INVESTABLE COMPOSITE AS OF FEBRUARY 29, 2000
- -------------------------------------------------------------------------------- Average Annual Total Return - -------------------------------------------------------------------------------- 1yr Since Inception - -------------------------------------------------------------------------------- 8/29/97 94.99% 5.68% - --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Date Evolving Countries Fund-III IFC Investable Composite ---- --------------------------- ------------------------ 8/29/97 9840 10000 9/30/97 9899 10327 12/31/97 8000 8333 3/31/98 8826 8918 6/30/98 6278 7025 9/30/98 4896 5500 12/31/98 6077 6497 3/31/99 6542 7207 6/30/99 10519 8919 9/30/99 9197 8640 12/31/99 11832 10860 2/29/00 11483 10850
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee. Past performance is not indicative of future performance. Information is unaudited. - -------------------------------------------------------------------------------- [caad 234]A REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of GMO Trust and the Shareholders of GMO Foreign Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Foreign Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 18, 2000 GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS - 95.3% AUSTRALIA - 4.0% 363,591 Australia and New Zealand Banking Group Ltd 2,235,227 548,362 British American Tobacco Berhad 4,074,996 501,000 Burswood Ltd 187,690 129,100 Caltex Australia Ltd 170,467 383,140 Capral Aluminum Ltd 445,198 551,992 Email Ltd 698,352 490,510 Foodland Associated 2,274,413 2,232,929 Goodman Fielder Ltd 1,604,483 76,000 Lihir Gold Ltd ADR * 722,000 3,365,000 Menzies Gold NL * 268,660 2,128,012 MIM Holdings Ltd 1,346,126 300,000 National Australia Bank Ltd 3,942,843 296,888 Newcrest Mining Ltd * 793,152 2,933,091 Oil Search Ltd * 2,918,200 1,569,200 Orogen Minerals Ltd 1,493,772 54,000 Orogen Minerals Ltd GDR 144A 499,500 4,818,371 Pasminco Ltd * 3,314,307 370,081 Publishing & Broadcasting Ltd 3,452,917 3,786,403 Qantas Airways Ltd 8,278,493 1,426,276 Western Mining Corp Holdings Ltd 5,360,798 813,047 Westpac Banking Corp 5,193,061 ------------------- 49,274,655 ------------------- AUSTRIA - 0.2% 38,220 Bank Austria AG 1,663,193 4,827 Oesterreichische Brau Beteiligungs AG 186,352 7,170 RHI AG 194,179 3,072 RHI AG (New Shares) * 82,073 4,264 VA Technologie AG (Bearer) 252,057 26,160 Wienerberger Baustoffindustrie AG 483,562 ------------------- 2,861,416 ------------------- BELGIUM - 1.6% 18,144 Almanij NV 688,245 25,192 Cie Francois de Enterprises 4,052,776 7,334 Credit Commercial Dexia 999,104 17,668 Electrabel SA 4,774,670 96,135 Fortis 2,406,403 100,135 Fortis Strip * 964 17,437 GIB Holdings Ltd 520,412 5,649 Groupe Bruxelles Lambert NPV 1,225,311 15,883 Kredietbank NPV 607,067 24,172 Solvay et Cie 1,682,536 62,409 UCB SA 2,129,987 ------------------- 19,087,475 ------------------- See accompanying notes to the financial statements. 1 GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- BRAZIL - 0.6% 38,500 Cia Paranaense de Energia ADR 358,531 219,200 Tele Norte Leste Participacoes ADR 5,589,600 109,800 Ultrapar Participacoes SA ADR 1,331,325 ------------------- 7,279,456 ------------------- CANADA - 1.4% 98,720 Abitibi Consolidated Inc 870,859 26,100 Alcan Aluminum Ltd * 857,109 81,893 Alliance Forest Products Inc (a) * 1,066,697 91,000 AUR Resources Inc * 124,176 295,000 Boliden Ltd * 662,784 55,157 Cambridge Shopping Centres Ltd * 319,310 23,500 Canada Life Financial Corp 144A 370,882 61,581 Canadian Hotel Income Properties 356,499 63,000 Canadian Occidental Petroleum Ltd 1,167,953 73,264 Concord Pacific Group * 33,325 43,000 Falconbridge Ltd 613,439 101,500 Iamgold (International African Mining Gold) * 220,348 90,000 Inco Ltd * 1,572,364 80,000 Industrial-Alliance Life Insurance Co * 904,204 220,100 KAP Resources Ltd (b) * 2,275 79,000 Manulife Financial Corp 974,569 200,000 Meridian Gold Inc * 1,219,848 67,137 Oxford Properties Group * 545,980 109,000 Rothmans Inc 1,220,710 633,600 Semi-Tech Class A (b) * 10,917 38,800 St Laurent Paperboard * 699,256 124,300 Tembec Inc Class A * 1,237,860 97,000 TimberWest Forest Corp 594,969 62,740 Trizec Hahn Corp (Sub-Voting) 918,832 192,000 TVX Gold Inc * 145,555 78,300 Ulster Petroleums Ltd * 366,947 ------------------- 17,077,667 ------------------- FINLAND - 0.6% 21,900 Huhtamaki Oyj Class I 727,406 76,500 Merta Serla Oyj 673,901 182,100 Metso Oyj * 2,384,308 182,150 Oyj Hartwall Abp 2,700,620 42,500 UPM-Kymmene Oyj 1,178,406 ------------------- 7,664,641 ------------------- 2 See accompanying notes to the financial statements. GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- FRANCE - 7.3% 29,853 Alcatel Alsthom Cie Generale d'Electricite SA 6,989,805 53,242 Aventis SA Class A 2,716,713 12,940 Axa SA 1,625,767 39,271 Banque Nationale de Paris 3,100,269 53,495 BIC SA 2,335,630 3,228 Bouygues 2,688,210 5,882 Cap Gemini SA 1,619,588 5,442 Chargeurs International SA 302,307 5,630 Christian Dior 1,151,810 15,281 Club Mediterranee SA * 1,756,587 3,351 Colas SA 583,938 68,117 Compagnie Generale d'Industrie et de Participations 4,574,180 3,073 Elf Gabon 275,143 7,764 Eridania Beghin-Say SA 651,802 661,570 Eurotunnel SA Units (Bearer) * 815,266 20,107 France Telecom SA 3,242,467 17,482 Gaz et Eaux 1,009,848 6,789 Groupe Danone 1,364,740 2,299 Guyenne et Gascogne 847,718 6,054 Imetal 716,904 8,290 Labinal SA 682,392 9,780 Lafarge Coppee SA 729,716 32,610 Lagardere Groupe 3,067,319 2,441 LVMH (Louis Vuitton Moet Hennessy) 905,953 43,484 Michelin SA Class B 1,357,657 26,833 Pechiney SA Class A 1,565,508 17,367 Pernod Ricard 877,804 19,292 Peugeot SA 3,976,559 9,740 Pinault Printemps Redoute 1,960,769 14,600 Renault SA 581,925 10,530 Saint-Gobain 1,464,906 5,565 Sidel (Bearer) 455,405 27,663 Sophia (EX-SFI) * 660,487 33,065 SPIE Batignolles 2,132,833 60,320 Suez Lyonnaise des Eaux 9,930,497 20,719 Suez Lyonnaise des Eaux Strip * 199 6,315 Sylea (Bearer) 210,360 8,830 Technip SA 965,723 62,544 Thomson CSF 2,468,784 113,783 Total Fina SA 15,062,380 93,950 Usinor Sacilor 1,370,323 3,460 Vallourec 139,907 24,686 Worms et Compagnie SA 396,900 ------------------- 89,332,998 ------------------- See accompanying notes to the financial statements. 3 GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- GERMANY - 6.6% 119,600 Adidas Salomon AG 6,355,998 128,500 Bankgesellschaft Berlin AG * 2,035,085 43,990 Bayer AG 1,831,697 84,400 Bayerische Motoren Werke AG 2,161,412 33,300 Brau und Brunnen * 1,251,926 101,500 Celanese AG * 2,013,014 128,000 Commerzbank AG 4,559,584 360,810 Continental AG 5,940,024 63,800 DaimlerChrysler AG 4,324,211 13,200 DePfa Deutsche Pfandbriefbank AG 1,054,789 79,555 Deutsche Bank AG 6,694,104 165,940 Dredsner Bank AG 7,955,985 3,331 Koelnische Rueckversicherungs-Gesellschaft AG (New Shares) 2,501,398 9,945 Koelnische Rueckversicherungs-Gesellschaft AG (Registered) 7,468,148 201,750 K&S AG 2,521,168 168,500 Lufthansa AG 3,758,716 79,200 Metallgesellschaft 1,490,684 55,000 Rheinmetall AG 540,103 152,460 RWE AG 5,093,296 268,000 Stinnes AG * 4,824,918 136,600 Veba AG 6,102,141 ------------------- 80,478,401 ------------------- GREECE - 0.0% 38,400 Hellenic Telecommunications ADR 576,000 ------------------- HONG KONG - 3.7% 7,460,882 Akai Holdings Ltd * 167,762 2,562,400 Amoy Properties Ltd 1,440,420 805,000 CLP Holdings Ltd 3,547,759 293,000 Goldlion Holdings Ltd 27,859 1,580,800 Hang Lung Development Co Ltd 1,228,843 609,000 Henderson Land Development Co Ltd 2,590,058 1,265,000 HKR International Ltd 621,707 2,796,587 Hong Kong Electric Holdings Ltd 8,534,068 4,891,641 Hong Kong Land Holdings 6,212,384 1,044,358 Hysan Development Co Ltd 1,086,922 302,000 Jardine International Motor Holdings Ltd 92,158 487,712 Jardine Matheson Holdings Ltd 1,706,992 875,263 Jardine Strategic Holdings Ltd 1,382,916 1,110,266 Liu Chong Hing Bank Ltd 998,595 1,050,000 New World Infrastructure * 1,180,488 220,000 Orient Overseas International Ltd * 98,936 4 See accompanying notes to the financial statements. GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- HONG KONG - CONTINUED 3,704,073 Regal Hotels International Ltd * 271,280 5,827,000 South China Morning Post Ltd 5,802,443 681,500 Swire Pacific Ltd Class A 3,266,170 2,844,500 Swire Pacific Ltd Class B 1,845,701 1,737,000 Wharf Holdings Ltd 2,979,513 779,000 Wheelock and Co Ltd 520,481 ------------------- 45,603,455 ------------------- HUNGARY - 0.1% 9,700 Egis Rt 458,165 48,000 Mol Magyar Olaj es Gazipari Rt (New Shares) 910,481 ------------------- 1,368,646 ------------------- INDIA - 2.7% 111,353 Asian Paints Ltd 957,491 89,415 Bajaj Auto Ltd * 613,032 248,950 Bharat Heavy Electricals Ltd 822,008 156,100 Bharat Petrol Corp 994,344 254,000 Container Corp of India 1,269,672 742,650 Corporation Bank 1,726,727 385,000 Gas Authority of India Ltd GDR 144A * 3,753,750 290,069 Grasim Co * 2,055,234 1,507,920 Great Eastern Shipping Co 618,918 182,105 Hindustan Petroleum Corp Ltd 598,161 91,052 Hindustan Petroleum Corp Ltd (New Shares) * 276,113 150,000 Indian Hotels Co Ltd 892,029 562,771 Indo Gulf Corp Ltd 603,274 629,097 Industrial Credit & Investment Corp of India Ltd * 2,365,718 50,000 Mahanagar Telephone Nigam 326,636 20,200 Mahanagar Telephone Nigam GDR 144A * 391,375 59,007 Mahindra & Mahindra GDR (Registered) (a) 755,290 100,000 Oil & Natural Gas Corp Ltd * 376,164 238,491 Reliance Industries 1,692,521 186,000 State Bank of India 963,880 141,800 Videsh Sanchar Nigam Ltd 7,000,057 115,000 Videsh Sanchar Nigam Ltd GDR 144A 4,226,250 ------------------- 33,278,644 ------------------- INDONESIA - 0.2% 1,401,000 Indah Kiat Pulp & Paper * 386,808 9,600,000 Matahari Putra Prima Tbk * 1,292,929 690,404 PT Daya Guna Samudera * 146,449 35,700 PT Indosat (Persero) Tbk Class B ADR 640,369 300,000 Tambang Timah Persero (Foreign Registered) 139,394 ------------------- 2,605,949 ------------------- See accompanying notes to the financial statements. 5 GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- IRELAND - 0.1% 172,335 Allied Irish Banks Plc 1,413,600 80,000 Eircom Plc 352,521 ------------------- 1,766,121 ------------------- ITALY - 6.2% 93,061 Assicurazioni Generali SPA 2,531,044 68,334 Banca Commerciale Italiana SPA 289,470 65,113 Banca di Legano SPA 298,393 428,990 Banca Intesa SPA 1,573,569 140,039 Banca Nazionale Del Lavoro SPA * 505,585 236,958 Banca Toscana 707,207 416,369 Banco Ambrosiano Veneto SPA (Non Convertible) 861,847 79,292 Beni Stabili SPA * 42,673 159,857 Buzzi Unicem SPA * 592,524 758,012 Credito Italiano 2,795,042 168,447 Danieli and Co SPA (Non Convertible) 379,483 228,852 Edison SPA 2,141,581 446,652 ENI SPA 2,076,969 27,984 Ericsson SPA 1,749,857 146,530 Falck Acciaierie and Ferriere Lombarde 1,107,413 46,290 Fiat SPA 1,408,276 2,907 Fiat SPA (Non Convertible) 41,869 251,316 Grouppo Editoriale L'Espresso 5,860,137 86,303 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 393,007 131,669 Immsi SPA * 301,699 650,940 Industriali Riunite SPA 3,710,020 305,204 Istituto Nazionale Delle Assicurazioni 633,215 165,256 Italcementi Fabbriche Riunite Cemento SPA (Non Convertible) 540,941 549,422 Italgas SPA 2,909,258 76,677 La Rinascente SPA 389,774 154,999 Magneti Marelli SPA 589,440 173,101 Mediaset SPA 4,199,655 43,386 Mediobanca SPA 388,460 462,667 Olivetti and Co SPA * 1,821,820 58,000 Pagnossin SPA 184,270 199,293 RAS SPA 1,736,417 53,792 San Paolo IMI SPA 849,327 1,435,372 Seat Pagine Gialle SPA 6,163,294 271,669 Sirti SPA 640,796 122,196 Societa Assicuratrice Industriale (SAI) 484,694 1,276,706 Telecom Italia Mobile SPA (Non Convertible) 6,612,820 648,492 Telecom Italia SPA 11,369,153 734,162 Telecom Italia SPA (Non Convertible) 5,795,879 72,569 Toro Assicurazioni 753,852 ------------------- 75,430,730 ------------------- 6 See accompanying notes to the financial statements. GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- JAPAN - 27.8% 39,940 Aiful Corp 8,402,106 215,000 Ajinomoto Co Inc 2,368,122 124,000 Alps Electric Co Ltd 1,127,632 63,000 Arisawa Manufacturing 1,284,602 848,000 Asahi Bank 3,589,459 297,000 Asahi Breweries Ltd 2,884,703 378,000 Asahi Chemical Industry Co 2,233,144 29,000 Bandai Co 1,111,374 141,000 Bridgestone Corp 3,151,017 243,000 Canon Inc 10,108,871 38,300 Chubu Electric Power Co Inc 544,229 366,000 Chugai Pharmaceutical Co Ltd 5,597,196 36,580 Circle K Japan Co Ltd 1,395,205 132,400 Credit Saison Co 2,074,192 262,000 Dainippon Ink & Chemicals Inc 932,520 104,000 Dainippon Printing Co Ltd 1,557,326 796,000 Daiwa Securities Co Ltd 12,644,122 692 East Japan Railway Co 3,124,409 188,000 Fuji Heavy Industries Ltd 1,199,654 115,000 Fuji Photo Film Co Ltd 5,056,210 166,000 Fujitec Co 1,453,662 156,000 Fujitsu Ltd 5,183,196 26,000 H I S Co Ltd 1,940,740 69,000 Hitachi Information Systems 4,051,249 466,000 Hitachi Ltd 6,358,691 390,000 Honda Motor Co Ltd 12,780,474 152,000 Hosiden Corp 8,066,633 30,000 Hoya Corp 2,449,593 125,000 INAX Corp 636,066 72,000 Japan Airport Terminal Co Ltd 564,963 266,000 Kao Corp 7,058,304 308,000 Komatsu Ltd 1,362,596 1,246,000 Marubeni Corp 5,069,974 272,000 Matsushita Electric Industrial Co Ltd 7,923,171 594,000 Minebea Co Ltd 6,840,016 223,000 Minolta Co Ltd 880,998 315,000 Mitsubishi Corp 2,325,474 532,000 Mitsui Petrochemical Industries Ltd 3,840,299 235,000 Mitsui & Co 1,454,645 72,000 Nihon Unisys Ltd 1,966,228 649,000 Nikko Securities 8,371,335 37,400 Nintendo Co Ltd 8,167,366 See accompanying notes to the financial statements. 7 GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- JAPAN - CONTINUED 177,000 Nippon Express Co Ltd 1,182,632 135,000 Nippon Meat Packers Inc 1,241,182 334,000 Nippon Mining & Metals Co Ltd 2,401,893 655 Nippon Telegraph & Telephone 9,062,856 3,510 Nippon Television Network 4,856,584 111,000 NSK Ltd 767,921 389 NTT Mobile Communication Network Inc 15,686,769 385,000 Oki Electric Industry * 2,302,535 130,000 Onward Kashiyama Co Ltd 1,255,564 80,500 Orix Corp 13,922,898 24,988 Paris Miki Inc 1,956,186 113,000 Pioneer Electronics Corp 3,589,914 33,000 Rinnai Corp 549,725 44,100 Rohm Co Ltd 14,311,274 1,218,000 Sakura Bank Ltd 6,951,764 48,000 Sanrio Co Ltd 1,922,534 140,000 Sekisui House Ltd 1,045,014 119,000 Shibusawa Warehouse 281,644 36,000 Shimachu Co 360,475 167,750 Shin-Etsu Chemical Co Ltd 9,085,727 183,000 Shionogi and Co Ltd 2,615,357 68,000 Showa Corp 241,409 19,100 SMC 3,546,857 164,000 Snow Brand Milk Products Co Ltd 688,216 19,000 Sony Corp 5,621,046 79,000 Sumitomo Bakelite Co Ltd 898,912 271,000 Sumitomo Corp 3,004,670 470,000 Sumitomo Trust & Banking 2,656,866 45,000 Suzuki Motor Corp 727,914 177,000 Takeda Chemical Industries Ltd 9,989,532 92,000 TDK Corp 8,801,784 210,000 Terumo Corp 5,467,207 26,000 Tokyo Broadcasting System Inc 1,185,745 45,100 Tokyo Seimitsu Co Ltd 5,833,790 53,000 Toppan Printing Co Ltd 522,498 112,000 Tsubaki Nakashima Co Ltd 1,131,674 15,000 Unicharm Corp 953,075 208,000 UNY Co Ltd 1,514,724 139,000 Ushio Inc 3,036,730 316 West Japan Railway Co 943,498 145,000 Yamaha Corp 993,901 370,000 Yamanouchi Pharmaceutical Co Ltd 17,682,400 114,000 Yamato Kogyo Co 421,319 ------------------- 340,345,981 ------------------- 8 See accompanying notes to the financial statements. GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- KOREA - 0.6% 390 Daehan Flour Mill 13,550 57,929 Hana Bank GDR 427,226 19,865 Hansol Paper Manufacturing Ltd 144,012 58,383 Hyundai Electronics Industries * 923,925 40,000 Hyundai Motor Co 426,132 91,044 Hyundai Motor Co GDR 496,190 41,000 Hyundai Motor Co GDR 144A * 146,575 71,528 Kookmin Bank GDR 144A (Registered) 808,266 68 Korea Trust * 408,000 6,693 LG Investments and Securities Co Ltd 119,528 22,290 Nhong Shim 847,375 42,890 Pacific Chemical Corp 678,744 178,373 Shinhan Bank 1,703,138 14,880 Sindoricom Co Ltd 420,969 ------------------- 7,563,630 ------------------- MALAYSIA - 0.6% 700,800 Genting Berhad 3,098,274 315,000 New Straits Times 1,326,316 407,000 Resorts World Berhad 1,478,053 477,000 Tanjong 1,198,776 ------------------- 7,101,419 ------------------- MEXICO - 0.3% 1,540,000 Controladora Comercial Mexicana SA de CV Classes B and C 1,479,505 89,400 Nuevo Grupo Iusacell SA ADR * 1,899,750 ------------------- 3,379,255 ------------------- NETHERLANDS - 5.2% 137,263 ABN Amro Holdings NV 2,841,224 50,929 Aegon NV 3,510,684 77,312 Akzo Nobel NV 2,978,029 119,058 ASM International NV * 3,884,267 14,410 Bam Groep 728,344 45,964 Dordtsche Petroleum 2,267,907 95,422 Elsevier NV 1,010,543 13,329 Fugro NV 708,995 56,682 Hal Trust Class B 965,900 66,932 Hal Trust (Participating Certificates) 1,140,566 43,865 Hunter Douglas NV 1,055,776 26,360 ING Groep NV 1,332,857 44,664 Kon Bolswessanen 481,603 73,531 Koninklijke KPN NV 9,348,080 67,743 Koninklijke Philips Electronics 12,538,463 23,173 Koninklijke Philips Electronics ADR 4,437,630 See accompanying notes to the financial statements. 9 GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- NETHERLANDS - CONTINUED 83,507 Koninklijke Volker Wessels 1,326,540 96,930 Laurus NV 1,185,156 86 Moeara Enim Petroleum 2,103,031 51,843 Royal Dutch Petroleum 2,709,714 62,692 TNT Post Group NV 1,553,582 11,683 Unilever NV 531,459 36,181 Van Ommeren Vopak * 851,673 30,242 Vendex NV 521,458 100,000 Wegener Arcade NV 1,920,686 29,107 Wereldhave NV 1,181,160 ------------------- 63,115,327 ------------------- NEW ZEALAND - 1.6% 461,000 Air New Zealand Class B 470,109 6,853,617 Brierley Investment Ltd 1,231,403 1,268,587 Carter Holt Harvey Ltd 1,225,891 38,750 DB Group Ltd 53,064 224,448 Fisher and Paykel Industries Ltd 681,200 1,365,110 Fletcher Challenge Buildings 1,537,922 1,299,050 Fletcher Challenge Energy 2,807,143 2,865,891 Fletcher Challenge Ltd * 779,339 2,874,521 Fletcher Challenge Paper 2,010,049 273,307 Lion Nathan Ltd 492,383 1,683,750 Telecom Corp of New Zealand 6,949,847 7,039,327 Trans Tasman Properties Ltd * 786,208 485,082 Wrightson Ltd * 91,867 ------------------- 19,116,425 ------------------- NORWAY - 0.5% 30,000 Norsk Data AS Class B ADR (b) * 300 286,100 Petroleum Geo-Services * 4,484,968 136,000 Prosafe ASA * 1,653,693 ------------------- 6,138,961 ------------------- PORTUGAL - 0.2% 193,000 Portugal Telecom SA 2,744,425 ------------------- SINGAPORE - 0.3% 3,019,546 Dairy Farm International Holdings Ltd 1,706,043 755,000 Singapore Land Ltd 1,392,876 ------------------- 3,098,919 ------------------- SOUTH AFRICA - 1.4% 20,300 Anglo Gold Ltd 1,052,642 460,700 Barlow Ltd 3,376,448 1,232,606 Goldfields Ltd 5,711,636 438,853 Liberty Life Association of Africa Ltd 4,274,610 10 See accompanying notes to the financial statements. GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- SOUTH AFRICA - CONTINUED 1,004,000 Sanlam Ltd 1,265,939 1,065,539 Sun International Ltd 218,324 125,700 Trencor Ltd 69,341 290,500 Western Areas Gold Mining Co Ltd 952,354 ------------------- 16,921,294 ------------------- SPAIN - 3.4% 13,800 Acerinox SA (Registered) 496,895 334,732 Banco Bilbao Vizcaya SA 4,866,175 46,230 Banco Popular Espanol 1,286,279 496,292 Banco Santander Central Hispano 5,208,076 27,000 Bankinter SA 1,703,923 186,548 Endesa 3,945,792 129,580 FENOSA SA 2,682,193 186,643 Iberdrola SA 2,341,368 158,580 Repsol SA 3,000,022 91,700 Tabacalera SA Class A 1,024,096 470,164 Telefonica de Espana SA * 13,511,614 83,691 Transportes Azkar SA 974,939 ------------------- 41,041,372 ------------------- SWITZERLAND - 2.8% 2,298 Banque Cantonale Vaudoise (Bearer) 647,363 2,186 Belimo Automation AG 921,097 379 Bobst AG (Bearer) 488,402 28,852 Credit Suisse Holdings (Registered) 4,591,349 1,825 Fischer (Georg) AG (Registered) 544,743 291 Flughafen Immobilien 600,872 3,197 Forbo Holdings AG (Registered) 1,314,518 5,230 Geberit International AG * 1,598,717 19,660 Hero AG 2,238,912 847 Holderbank Financiere Glarus AG (Bearer) 929,040 3,526 Jelmoli (Registered) 906,649 6,545 Kraftwerk Laufenberg (Bearer) 980,730 2,149 Merkur Holding AG (Registered) 618,269 1,781 Nestle AG (Registered) 3,002,849 2,696 Novartis AG (Registered) 3,432,213 416 Societe Generale de Surveillance Holding SA (Bearer) * 770,463 1,554 Sulzer Gebrueder AG (Registered) * 1,012,466 2,368 Sulzer Medica AG 565,601 4,003 Swatch Group AG (Bearer) 4,304,353 168 Swiss Insurance Co 262,311 627 Swiss Reinsurance (Bearer) 1,007,920 3,835 Zellweger Luwa AG (Bearer) 2,280,221 2,591 Zurich Allied 1,097,960 ------------------- 34,117,018 ------------------- See accompanying notes to the financial statements. 11 GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- TAIWAN - 0.2% 2,347,000 Pacific Electric Wire & Cable * 2,436,359 609,500 Standard Foods Taiwan Ltd * 545,436 ------------------- 2,981,795 ------------------- THAILAND - 0.2% 428,900 First Bangkok City (Foreign Registered) (b) * 113 1,291,800 Jasmine International Public Co (Foreign Registered) * 703,263 159,000 PTT Exploration and Production Public Co Ltd (Foreign Registered) * 771,743 487,700 Thai Telephone & Telecommunications (Foreign Registered) * 131,154 204,800 Total Access Communication * 790,528 ------------------- 2,396,801 ------------------- UNITED KINGDOM - 14.7% 137,441 Allied Domecq Plc 567,380 208,321 Allied Zurich Plc 1,770,943 163,777 Anglian Water Plc 1,151,825 440,000 Arjo Wiggins Appleton Plc 1,097,477 119,598 BAA 711,317 145,277 Barclays Plc 3,499,752 200,170 Bass Plc 2,121,929 101,613 Berkley Group 717,841 714,086 BG Group Plc 3,114,144 865,000 Billiton Plc 3,536,729 214,000 Blue Circle Industries 1,441,694 144,325 BOC Group Plc 2,914,056 135,200 Boots Co 982,861 1,064,998 BP Amoco Plc 8,196,138 226,953 BPB Industries Plc 971,833 113,630 British Aerospace 562,363 104,859 British Airways Plc 494,952 399,350 British Energy Plc 1,517,770 501,600 British Energy Plc (Deferred Shares) * - 98,490 British Land Co 540,297 946,855 British Telecom Plc 16,531,964 1,064,400 British-Borneo Oil & Gas Plc * 1,033,394 650,468 BTR Siebe Plc 2,983,032 271,708 Cable & Wireless 5,640,454 133,375 Capital Shopping Centres Plc 725,353 958,074 Centrica Plc 3,232,891 216,381 Commercial Union Plc 2,580,711 546,432 Cookson Group 1,828,765 1,241,250 Corus Group Plc 2,057,474 347,916 Diageo Plc 2,655,564 79,000 Dixons Group 1,696,102 12 See accompanying notes to the financial statements. GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- UNITED KINGDOM - CONTINUED 292,000 Enterprise Oil 1,463,566 315,000 FKI Plc 1,347,615 777,000 Gallaher Group Plc 3,081,860 191,491 Glaxo Wellcome Plc 4,588,873 278,424 Granada Group Plc 2,804,227 410,586 Great Portland Estates Plc 1,163,468 386,139 Great Universal Stores Plc 2,185,338 172,008 Hanson Plc 1,103,812 682,247 HSBC Holdings Plc 7,943,091 220,136 Imperial Chemical Industries Plc 1,690,674 210,316 Imperial Tobacco Group Plc 1,391,144 180,000 Johnson Matthey 2,051,614 652,060 Ladbroke Group 2,385,575 888,000 Lasmo Plc 1,328,245 211,000 Lloyds TSB Group Plc 1,941,945 265,510 Marconi Plc 3,309,168 472,500 Marks & Spencer 1,696,950 369,600 National Power 2,183,633 143,000 Norwich Union Plc 882,106 334,000 Nycomed Amersham Plc 2,627,883 711,000 Old Mutual Plc * 1,658,518 160,107 Peninsular & Oriental Steam Navigation Co 1,803,392 170,086 Powergen Plc 1,172,701 205,000 Prudential Corp 3,022,641 105,630 Railtrack Group Plc 1,075,556 322,500 Rank Group Plc 804,401 210,000 Reed International Plc 1,540,723 196,699 Reuters Holdings Plc 4,251,003 107,641 RMC Group 1,240,470 190,831 Rolls-Royce 621,339 312,961 Royal & Sun Alliance Insurance Group 1,709,433 154,000 Sainsbury (J) 633,307 195,000 Scottish Hydro-Electric Plc 1,632,304 350,000 Scottish Power Plc 2,657,657 153,771 Scottish & Newcastle Plc 996,491 160,593 Severn Trent Plc 1,337,319 1,045,000 Shell Transport & Trading (Registered) 7,184,397 350,000 Smith (David S.) Holdings Plc 773,539 182,224 Smithkline Beecham Plc 2,041,004 996,000 Stagecoach Holdings Plc 1,450,479 118,482 Standard Chartered 1,672,152 2,309 Tarmac Plc 21,215 See accompanying notes to the financial statements. 13 GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------- UNITED KINGDOM - CONTINUED 138,263 Thames Water Plc 1,516,969 226,228 TI Group Plc 1,202,652 296,491 Tomkins Plc 820,267 167,347 Trinity Mirror Plc 1,862,486 379,642 Unilever Plc 2,311,884 194,500 United News & Media Plc 2,583,804 194,904 United Utilities 2,013,800 271,030 Viglen Technology Plc (Entitlement Letters) * - 62,000 Viridian Group Plc 677,304 149,000 Whitbread Plc Class A 1,233,723 488,162 Williams Plc 2,022,922 119,146 Wolseley 576,025 ------------------- 180,169,669 ------------------- UNITED STATES - 0.2% 116,000 Freeport-McMoran Copper & Gold * 1,595,000 25,000 Impsat Fiber Networks Inc * 917,188 ------------------- 2,512,188 ------------------- TOTAL COMMON STOCKS (Cost $955,104,749) 1,166,430,733 ------------------- PREFERRED STOCKS - 0.9% BRAZIL - 0.1% 36,439,529 Gerdau SA 1,013,182 ------------------- GERMANY - 0.5% 92,800 Bayerische Motoren Werke AG 1,162,355 33,560 Dyckerhoff AG (Non Voting) 864,290 29,772 Metro AG Class I 659,249 23,144 Rheinmetall AG 191,624 51,500 Villeroy & Boch AG (Non Voting) 456,151 126,700 Volkswagen AG 2,890,936 ------------------- 6,224,605 ------------------- ITALY - 0.1% 36,213 Fiat SPA 613,608 18,541 IFI-Istituto Finanziario 469,464 ------------------- 1,083,072 ------------------- KOREA - 0.1% 22,000 Daewoo Securities Ltd 150,543 27,310 Dongwon Securities Co 346,474 46,976 Hyundai Motor Co GDR 144A 300,646 68,540 Jinro Ltd * 112,102 30,000 LG Investment and Securities Co Ltd 320,925 27,230 Shinyoung Securities 344,255 ------------------- 1,574,945 ------------------- 14 See accompanying notes to the financial statements. GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares/ Par Value ($) Description Value ($) - ----------------------------------------------------------------------------------------------------------- THAILAND - 0.1% 2,300,000 Siam Commercial Bank Ltd * 1,387,905 ------------------- TOTAL PREFERRED STOCKS (Cost $14,694,203) 11,283,709 ------------------- CONVERTIBLE BONDS - 0.3% HONG KONG - 0.1% USD 860,000 Sino Land Co, 5.00% due 2/26/01 (a) 894,400 ------------------- KOREA - 0.0% KRW 19,462 Shinhan Bank, 15.00% due 12/02/48 (c) 199,592 ------------------- MEXICO - 0.0% USD 870,000 Grupo Financiero Invermexico, 7.50% due 6/16/01 69,600 ------------------- SINGAPORE - 0.2% USD 1,830,000 Keppel Corp 144A, 2.00% due 8/12/02 1,889,475 ------------------- TOTAL CONVERTIBLE BONDS (Cost $2,981,266) 3,053,067 ------------------- INVESTMENT FUNDS - 0.1% INDIA - 0.1% 157,150 India Fund Class A * 1,302,445 ------------------- KOREA - 0.0% 39,500 Korea Investment Fund 303,656 ------------------- TOTAL INVESTMENT FUNDS (Cost $1,095,946) 1,606,101 ------------------- RIGHTS & WARRANTS - 0.1% CANADA - 0.0% 116,600 KAP Resources Ltd Class A Warrants 8/05/00 (b) * 804 ------------------- ITALY - 0.0% 68,334 Banca Intesa SPA Warrants 11/15/02 * 182,892 ------------------- THAILAND - 0.1% 2,300,000 Siam Commercial Bank Ltd Warrants 5/10/02 * 561,196 ------------------- TOTAL RIGHTS & WARRANTS (Cost $172,885) 744,892 ------------------- See accompanying notes to the financial statements. 15 GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares/ Par Value ($) Description Value ($) - ----------------------------------------------------------------------------------------------------------- DEBT OBLIGATIONS - 0.0% UNITED KINGDOM - 0.0% GBP 102,000 BG Transco Holdings Plc Index Linked, 4.186% due 12/14/22 157,786 GBP 102,000 BG Transco Holdings Plc, 7.00% due 12/16/24 160,306 GBP 102,000 BG Transco Holdings Plc, 7.057% Variable Rate due 12/14/09 161,397 GBP 35,888 British Aerospace Plc, 7.45% due 11/30/03 56,088 ------------------- 535,577 ------------------- TOTAL DEBT OBLIGATIONS (Cost $433,564) 535,577 ------------------- SHORT-TERM INVESTMENTS - 4.7% CASH EQUIVALENTS - 4.7% $ 6,900,000 Royal Bank of Canada Time Deposit, 5.81% due 3/01/00 6,900,000 50,555,632 The Boston Global Investment Trust (d) 50,555,632 ------------------- 57,455,632 ------------------- TOTAL SHORT-TERM INVESTMENTS (Cost $57,455,632) 57,455,632 ------------------- TOTAL INVESTMENTS - 101.4% (Cost $1,031,938,245) 1,241,109,711 Other Assets and Liabilities (net) - (1.4%) (17,157,720) ------------------- TOTAL NET ASSETS - 100.0% $ 1,223,951,991 ------------------- -------------------
16 See accompanying notes to the financial statements. GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 - -------------------------------------------------------------------------------- NOTES TO THE SCHEDULE OF INVESTMENTS: ADR American Depositary Receipt GDR Global Depository Receipt GBP British Pound KRW Korean Won USD United States Dollar (a) Security is restricted as to public resale. The aggregate market value of restricted securities is $2,716,387 or .22% of net assets. (b) Bankrupt issuer. (c) Warrants included in position of security. (d) Represents investment of security lending collateral (Note 1). 144A Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. * Non-income producing security. See accompanying notes to the financial statements. 17 GMO FOREIGN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 - -------------------------------------------------------------------------------- At February 29, 2000, industry sector diversification of the Fund's equity investments was as follows: INDUSTRY SECTOR (UNAUDITED) Telecommunications 11.1 % Banking 9.0 Consumer Goods 8.0 Energy Services 5.6 Electronic Equipment 5.4 Utilities 5.2 Conglomerates 4.8 Financial Services 4.8 Health Care 4.6 Chemicals 3.9 Machinery 3.9 Services 3.6 Communications 3.5 Insurance 3.5 Metals and Mining 3.5 Automotive 2.9 Construction 2.6 Transportation 2.6 Retail Trade 2.1 Food and Beverage 2.1 Real Estate 1.9 Computers 1.7 Paper and Allied Products 1.4 Aerospace 0.4 Textiles 0.4 Miscellaneous 1.5 ------------- 100.0 % ------------- -------------
18 See accompanying notes to the financial statements. GMO FOREIGN FUND (A Series of GMO Trust) Statement of Assets and Liabilities - February 29, 2000 - ---------------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $1,031,938,245) (Note 1) $ 1,241,109,711 Foreign currency, at value (cost $38,113,560) (Note 1) 36,905,750 Cash 58,423 Receivable for investments sold 7,672,360 Dividends and interest receivable 1,354,868 Foreign withholding taxes receivable 853,424 Receivable for expenses waived or borne by Manager (Note 2) 91,375 ------------------- Total assets 1,288,045,911 ------------------- LIABILITIES: Payable upon return of securities loaned (Note 1) 50,555,632 Payable for investments purchased 12,068,870 Accrued capital gains taxes payable (Note 1) 526,551 Payable to affiliate for (Note 2): Management fee 586,888 Shareholder service fee 143,158 Accrued expenses 212,821 ------------------- Total liabilities 64,093,920 ------------------- NET ASSETS $ 1,223,951,991 ------------------- ------------------- NET ASSETS CONSIST OF: Paid-in capital $ 983,661,450 Distributions in excess of net investment income (5,741,231) Accumulated undistributed net realized gain 38,633,069 Net unrealized appreciation 207,398,703 ------------------- $ 1,223,951,991 ------------------- ------------------- NET ASSETS ATTRIBUTABLE TO: Class II Shares $ 60,278,431 ------------------- ------------------- Class III Shares $ 1,022,498,368 ------------------- ------------------- Class IV Shares $ 141,175,192 ------------------- ------------------- SHARES OUTSTANDING: Class II 4,586,703 ------------------- ------------------- Class III 77,702,492 ------------------- ------------------- Class IV 10,726,851 ------------------- ------------------- NET ASSET VALUE PER SHARE: Class II $ 13.14 ------------------- ------------------- Class III $ 13.16 ------------------- ------------------- Class IV $ 13.16 ------------------- -------------------
See accompanying notes to the financial statements. 19 GMO FOREIGN FUND (A Series of GMO Trust) Statement of Operations - Year Ended February 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of foreign tax expense of $2,188,013) $ 24,685,134 Interest (including security lending income of $308,543) 2,217,997 ----------------- Total income 26,903,131 ----------------- EXPENSES: Management fee (Note 2) 7,261,054 Custodian fees 1,022,950 Audit fees 62,136 Transfer agent fees 51,558 Legal fees 31,214 Trustees fees (Note 2) 13,855 Registration fees 5,207 Miscellaneous 14,979 Fees waived or borne by Manager (Note 2) (1,196,212) ----------------- 7,266,741 Shareholder service fee (Note 2) Class II 112,462 Class III 1,531,185 Class IV 124,440 ----------------- Net expenses 9,034,828 ----------------- Net investment income 17,868,303 ----------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 150,637,082 Foreign currency, forward contracts and foreign currency related transactions (2,455,930) ----------------- Net realized gain 148,181,152 ----------------- Change in net unrealized appreciation (depreciation) on: Investments (Note 1) 107,630,225 Foreign currency, forward contracts and foreign currency related transactions (1,087,835) ----------------- Net unrealized gain 106,542,390 ----------------- Net realized and unrealized gain 254,723,542 ----------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 272,591,845 ----------------- -----------------
20 See accompanying notes to the financial statements. GMO FOREIGN FUND (A Series of GMO Trust) Statement of Changes in Net Assets - --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: YEAR ENDED YEAR ENDED Operations: FEBRUARY 29, 2000 FEBRUARY 28, 1999 ------------------- ------------------- Net investment income $ 17,868,303 $ 18,297,050 Net realized gain 148,181,152 31,609,905 Change in net unrealized appreciation (depreciation) 106,542,390 (47,678,215) ------------------- ------------------- Net increase in net assets resulting from operations 272,591,845 2,228,740 ------------------- ------------------- Distributions to shareholders from: Net investment income Class II (821,414) (1,237,030) Class III (15,074,302) (18,110,163) Class IV (2,182,701) (3,254,066) ------------------- ------------------- Total distributions from net investment income (18,078,417) (22,601,259) ------------------- ------------------- Distributions to shareholders from: Net realized gains Class II (5,886,575) (536,347) Class III (106,929,723) (7,886,316) Class IV (14,634,521) (1,226,681) ------------------- ------------------- Total distributions from net realized gains (127,450,819) (9,649,344) ------------------- ------------------- Net share transactions: (Note 5) Class II 22,900,809 (19,441,415) Class III (12,766,551) 104,968,005 Class IV (4,892,649) (85,018,178) ------------------- ------------------- Increase in net assets resulting from net share transactions 5,241,609 508,412 ------------------- ------------------- Total increase (decrease) in net assets 132,304,218 (29,513,451) NET ASSETS: Beginning of period 1,091,647,773 1,121,161,224 ------------------- ------------------- End of period (including distributions in excess of net investment income of $5,741,231 and $5,330,621, respectively) $ 1,223,951,991 $ 1,091,647,773 ------------------- ------------------- ------------------- -------------------
See accompanying notes to the financial statements. 21 GMO FOREIGN FUND (A Series of GMO Trust) Financial Highlights (For a Class II share outstanding throughout each period) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ----------------------------------------------------------------------- 2000 1999 1998 1997 * -------------- -------------- -------------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.79 $ 12.09 $ 10.65 $ 10.02 -------------- -------------- -------------- -------------- Income from investment operations: Net investment income 0.17 (c) 0.20 (c) 0.18 (c) 0.06 Net realized and unrealized gain (loss) 2.89 (0.14) 1.48 0.65 -------------- -------------- -------------- -------------- Total from investment operations 3.06 0.06 1.66 0.71 -------------- -------------- -------------- -------------- Less distributions to shareholders from: Net investment income (0.21) (0.25) (0.22) (0.08) Net realized gains (1.50) (0.11) (0.00)(d) - -------------- -------------- -------------- -------------- Total distributions (1.71) (0.36) (0.22) (0.08) -------------- -------------- -------------- -------------- NET ASSET VALUE, END OF PERIOD $ 13.14 $ 11.79 $ 12.09 $ 10.65 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- TOTAL RETURN (a) 25.63% 0.36% 15.94% 7.08% *** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 60,278 $ 33,780 $ 53,949 $ 21,957 Net expenses to average daily net assets 0.82% 0.82% 0.82% 0.84% ** (b) Net investment income to average daily net assets 1.28% 1.64% 1.60% 0.83% ** Portfolio turnover rate 35% 27% 19% 13% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.03 $ 0.03 $ 0.02
* Period from September 30, 1996 (commencement of operations) to February 28, 1997. ** Annualized. *** Not annualized. (a) The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .02% of average daily net assets. (c) Computed using average shares outstanding throughout the period. (d) The per share realized gain distribution was $0.004. 22 See accompanying notes to the financial statements. GMO FOREIGN FUND (A Series of GMO Trust) Financial Highlights (For a Class III share outstanding throughout each period) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ----------------------------------------------------------------------- 2000 1999 1998 1997 * -------------- -------------- -------------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD $ $11.81 $ $12.10 $ 10.66 $ 10.00 -------------- -------------- -------------- -------------- Income from investment operations: Net investment income 0.20 (c) 0.20 (c) 0.21 (c) 0.08 Net realized and unrealized gain (loss) 2.86 (0.12) 1.45 0.66 -------------- -------------- -------------- -------------- Total from investment operations 3.06 0.08 1.66 0.74 -------------- -------------- -------------- -------------- Less distributions to shareholders from: Net investment income (0.21) (0.26) (0.22) (0.08) Net realized gains (1.50) (0.11) (0.00)(d) - -------------- -------------- -------------- -------------- Total distributions (1.71) (0.37) (0.22) (0.08) -------------- -------------- -------------- -------------- NET ASSET VALUE, END OF PERIOD $ 13.16 $ 11.81 $ $12.10 $ 10.66 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- TOTAL RETURN (a) 25.65% 0.00 15.95% 7.37% *** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 1,022,498 $ 927,108 $ 847,427 $ 671,829 Net expenses to average daily net assets 0.75% 0.75% 0.75% 0.76% ** (b) Net investment income to average daily net assets 1.48% 1.60% 1.80% 1.24% ** Portfolio turnover rate 35% 27% 19% 13% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.03 $ 0.03 $ 0.02
* Period from June 28, 1996 (commencement of operations) to February 28, 1997. ** Annualized. *** Not annualized. (a) The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .01% of average daily net assets. (c) Computed using average shares outstanding throughout the period. (d) The per share realized gain distribution was $0.004. See accompanying notes to the financial statements. 23 GMO FOREIGN FUND (A Series of GMO Trust) Financial Highlights (For a Class IV share outstanding throughout each period) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, -------------------------------------------------------------- 2000 1999 1998 * ------------------ ------------------ ------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 11.81 $ 12.11 $ 10.90 ------------------ ------------------ ------------------ Income from investment operations: Net investment income 0.21 (d) 0.22 (d) - (b) Net realized and unrealized gain (loss) 2.86 (0.15) 1.21 ------------------ ------------------ ------------------ Total from investment operations 3.07 0.07 1.21 ------------------ ------------------ ------------------ Less distributions to shareholders from: Net investment income (0.22) (0.26) - Net realized gains (1.50) (0.11) - ------------------ ------------------ ------------------ Total distributions (1.72) (0.37) - ------------------ ------------------ ------------------ NET ASSET VALUE, END OF PERIOD $ 13.16 $ 11.81 $ 12.11 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ TOTAL RETURN (a) 25.74% 0.53% 11.10% *** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 141,175 $ 130,760 $ 219,785 Net expenses to average daily net assets 0.69% 0.69% 0.69% ** Net investment income to average daily net assets 1.55% 1.81% 0.26% ** Portfolio turnover rate 35% 27% 19% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.03 $ 0.00 (c)
* Period from January 9, 1998 (commencement of operations) to February 28, 1998. ** Annualized. *** Not annualized. (a) The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Net investment income earned was less than $.01 per share. Computed using average shares outstanding throughout the period. (c) Fees or expenses voluntarily waived or borne by the manager were less than $.01 per share. (d) Computed using average shares outstanding throughout the period. 24 See accompanying notes to the financial statements. GMO FOREIGN FUND (A Series of GMO Trust) Notes to Financial Statements February 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Foreign Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities of non-U.S. issuers. The Fund's benchmark is the Morgan Stanley Capital International EAFE Index. The Fund offers three classes of shares: Class II, Class III and Class IV. The principal economic difference between the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully outlined in the Trust's prospectus. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. Certain securities held by the Fund were valued on the basis of a price provided by a principal market maker. These prices may differ from the value that would have been used had a broader market for the securities existed and the differences could be material to the financial statements. 25 GMO FOREIGN FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. There were no forward foreign currency contracts outstanding as of February 29, 2000. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are offset against the proceeds or amounts paid on the future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able 26 GMO FOREIGN FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- to enter into a closing transaction because of an illiquid market. At February 29, 2000 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premuims paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. FUTURES CONTRACTS The Fund may purchase or sell index futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 29, 2000, there were no outstanding futures contracts. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund loaned securities having a market value of $46,792,975 collateralized by cash in the amount of $50,555,632 which was invested in a short-term instrument. 27 GMO FOREIGN FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- TAXES The 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"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U. S. federal income tax purposes. Therefore, no provision for U. S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund has recorded a deferred tax liability in respect of unrealized appreciation on foreign securities of $526,551 for potential capital gains taxes at February 29, 2000. The accrual for capital gains taxes is included in net unrealized gain in the Statement of Operations. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. The Fund declares separate dividends from net investment income on each class of shares. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to foreign currency and passive foreign investment company transactions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U. S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Accumulated Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital --------------------------- -------------------------- --------------------------- $(200,496) $200,496 -
28 GMO FOREIGN FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments of domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .60% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .22% for Class II shares, .15% for Class III shares, and .09% for Class IV shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. 29 GMO FOREIGN FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- Prior to March 1, 1999, GMO earned a management fee at the annual rate of 0.75% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceeded .60% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000, was $13,855. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000 aggregated $401,792,976 and $540,952,755, respectively. At February 29, 2000 the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------------------- -------------------------- ------------------------- ---------------------- $1,053,701,091 $309,817,032 $122,408,412 $187,408,620
4. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 -------------------------------------------- -------------------------------------------- Class II: Shares Amount Shares Amount ------------------- --------------------- -------------------- ------------------- Shares sold 1,357,706 $ 17,980,116 854,704 $ 10,796,765 Shares issued to shareholders in reinvestment of distributions 490,326 6,671,247 146,654 1,773,377 Shares repurchased (125,595) (1,750,554) (2,597,721) (32,011,557) ------------------- --------------------- -------------------- ------------------- Net increase (decrease) 1,722,437 $ 22,900,809 (1,596,363) $ (19,441,415) ------------------- --------------------- -------------------- ------------------- ------------------- --------------------- -------------------- -------------------
30 GMO FOREIGN FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- SHARE TRANSACTIONS - CONTINUED
Year Ended Year Ended February 29, 2000 February 28, 1999 -------------------------------------------- ---------------------------------------- Class III: Shares Amount Shares Amount ------------------- --------------------- ------------------ ------------------ Shares sold 3,202,401 $ 42,410,128 17,082,138 $ 209,494,684 Shares issued to shareholders in reinvestment of distributions 8,451,999 115,039,709 1,616,582 19,533,092 Shares repurchased (12,483,507) (170,216,388) (10,176,725) (124,059,771) ------------------- --------------------- ------------------ ------------------ Net increase (decrease) (829,107) $ (12,766,551) 8,521,995 $ 104,968,005 ------------------- --------------------- ------------------ ------------------ ------------------- --------------------- ------------------ ------------------ Year Ended Year Ended February 29, 2000 February 28, 1999 -------------------------------------------- ---------------------------------------- Class IV: Shares Amount Shares Amount ------------------- --------------------- ------------------ ------------------ Shares sold 3,174,497 $ 41,207,751 445,359 $ 5,633,670 Shares issued to shareholders in reinvestment of distributions 1,137,658 15,485,345 128,073 1,542,577 Shares repurchased (4,657,696) (61,585,745) (7,653,734) (92,194,425) ------------------- --------------------- ------------------ ------------------ Net decrease (345,541) $ (4,892,649) (7,080,302) $ (85,018,178) ------------------- --------------------- ------------------ ------------------ ------------------- --------------------- ------------------ ------------------
31 GMO FOREIGN FUND (A Series of GMO Trust) Federal Tax Information - (Unaudited) February 29, 2000 - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all the Fund's distributions are from investment company taxable income, except that the Fund has designated 66.18% as net capital gain dividends. 32 GMO FOREIGN FUND (A Series of GMO Trust) PORTFOLIO MANAGERS Mr. Jui Lai and Ms. Ann Spruill are responsible for the management of the GMO International Active Division. Mr. Lai and Ms. Spruill have each been portfolio managers with GMO for more than ten years. The GMO Foreign Fund is managed on a geographic basis by Mr. Lai, Ms. Spruill, Mr. Hoyt Ludington and Mr. Richard Mattione. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE For the fiscal year ended February 29, 2000, the Class III shares of the GMO Foreign Fund returned 25.7%, outperforming its Morgan Stanley Capital International Europe, Australasia and Far East (EAFE) Index benchmark by 0.2% after fees. A positive performance on stock selection offset adverse country selection; there were no hedges in place during the year. Despite the strong return of the MSCI EAFE Index, only fourteen of the twenty equity markets within the Index posted positive returns in local currencies over the past twelve months; exactly the same fourteen posted positive returns in U.S. dollars over this period. It was a welcome event that the MSCI EAFE Index posted a higher return than that of the S&P 500, which returned 11.7% during this period. Still, it was not possible to come close to the returns of the technology-stock laden NASDAQ Index, which returned 105.2% over the period. All Pacific markets except New Zealand managed positive returns. Hong Kong led the way with a return of 65.5%, followed closely by Singapore with a return of 58.6%. Both were boosted by relief at the end of the economic crisis in Southeast Asia. Meanwhile, Japan returned 52.8% in dollars. Restructuring themes provided impetus to Japan early in the fiscal year, but by the end of the year tech themes were dominating the performance of the Japanese market just as they dominated globally. This was helped by the addition of several "new Japan" tech names to the Japanese portion of the Index during the year. The story was mixed in Europe. Ten of the fifteen markets were up. Finland and Sweden provided stupendous returns of 163.6% and 115.3%, respectively. A telecom equipment maker drove the performance of each of these markets - Nokia in the case of Finland, and Ericsson in the case of Sweden. The next best return in Europe was recorded by Germany, which rose 36.8%. Belgium was not a happy place, however, with a total return of -27.8% for last place within the MSCI EAFE countries. Strikingly, Belgium was one of the few markets that did not have a telecom stock in its index. Our country selection reduced returns by 199 basis points during the fiscal year. Low levels of holdings in Finland and Sweden, two markets that excelled on the strength of rather pricey tech stocks, cut 141 basis points and 135 basis points, respectively. Together those two markets (which even after the run-up of the last twelve months are less than 7% of the MSCI EAFE Index) more than account for the underperformance on country selection. Holdings of cash during an excellent twelve-month period for stocks accounted for a further 88 basis points of underperformance. An overweight position in Belgium, the worst performing market, cost 64 basis points, while a mildly underweight position in Japan early in the fiscal year sliced 50 basis points from returns. Holdings in emerging markets added 153 basis points, offsetting some of the negatives. A low level of holdings in Switzerland and the United Kingdom, two weaker markets, restored a further 129 basis points and 92 basis points. On one crucial aspect, markets within the MSCI EAFE Index mimicked the headlines from the United States during the past fiscal year. A new "sector" has been created with the acronym of "TMT" for telecoms, media and technology. Enthusiasm for these stocks swept the world. Some of these companies have genuine business prospects, business plans and (on rare occasions) sensible market valuations. Many are full of hype and subject to the possibility that margins will prove to be much lower than expected. We have seen this pattern before in energy and pharmaceutical stocks, but the scope and duration of this sector move has been stunning. The enthusiasm for TMT stocks makes it difficult, but not impossible, for a value investor. We are able to seize returns even in this area by digging to find those companies where fundamentals justify the enthusiasm or identifying companies before the values are recognized. Thus we are especially pleased that our stock selection added 218 basis points to returns during a tough year for value. Value (as measured by price-to-book, price-earnings and price-to-cash-flow ratios, along with dividend yield) underperformed the MSCI EAFE Index by 660 basis points. The only factor with positive returns was cheapness on cash flow, which was helped by strength in telecom stocks (which often have considerable gross cash flow but not so much in earnings). Stocks cheap on yield, a traditional value measure, turned in the worst performance by undershooting the MSCI EAFE Index by 1149 basis points during the fiscal year. Our stock selection beat the market in Japan, the Netherlands and Italy. However, we were behind in larger markets such as Germany and the United Kingdom, where value greatly lagged the hot telecom and tech stock names. At the end of the fiscal year we were at a weight of 27.4% in Japan. This is 0.7% underweight relative to the benchmark. We were briefly overweight in Japan, but decided not to add further to positions in August when the weight of Japan in the MSCI EAFE Index was bumped up by the addition of numerous "new economy" companies. Japan's main attraction at this stage is that the ROE seems considerably below what could be accomplished, while there has been grievous underperformance over the longer run (despite outperformance in 1999). Recognition of the need for restructuring so as to boost ROE seems to be becoming even more prevalent. Unfortunately, attainment of announced targets has been slow, so the story remains one of mostly modest steps toward adjustment rather than radical measures to boost earnings. We are currently most overweight in Australia, New Zealand, Belgium and the emerging markets. We are most underweight in Germany, but also have sizable underweight positions in the United Kingdom and Switzerland. CURRENCY HEDGING There were no hedges in place during the most recent fiscal year. Our policy is generally to be unhedged, recognizing that in doing so we achieve the desired exposure to the underlying real assets (the business operations). However, to protect the dollar value of our investments, we will on occasion hedge out a particular currency, either because it is significantly overvalued or because the currency seems at risk due to unfavorable economic developments. MALAYSIA VALUATION Upon imposition of foreign exchange controls in Malaysia in 1998, it was necessary to review the valuation of our holdings in Malaysia. Initially, we applied a 35% discount, which had been reduced to 30% at the end of the previous fiscal year. That discount was brought to zero in September 1999, coincident with the removal of the foreign exchange controls. MSCI removed Malaysia from all its benchmarks upon the imposition of exchange controls. MSCI plans to reinstate Malaysia in many indices, such as the Emerging Market Free Index, at the end of May 2000, but will not add Malaysia to the MSCI EAFE benchmark at that time. EMERGING MARKETS Our investments in emerging markets continue to be on an opportunistic stock-picking basis using GMO's traditional long-term value investment philosophy. Our policy is to invest from 0% to 10% of the portfolio in emerging markets, subject to stock selection opportunities and attractive valuations relative to the developed markets. At the end of the fiscal year 7.7% of the GMO Foreign Fund was invested in emerging markets. India was the largest emerging markets exposure at the end of the fiscal year, followed by South Africa and Korea. Because of the extremely good performance of emerging markets, exposure to emerging markets enhanced our returns during the past fiscal year. OUTLOOK The Foreign Fund is managed with a long-term investment horizon and consequent low turnover. We typically buy company stocks at relatively low price-to-earnings, low price-to-cash flow and low price-to-book or asset ratios. Currently the Foreign Fund stands at a discount to the market on all of these ratios as well as a premium on yield. We believe that this is an opportune time to invest in foreign markets. In Europe we see an increasing number of companies starting to adopt a more positive attitude to shareholder value which, in line with the U.S. experience, should be good for returns. In large swathes of Asia's markets there has been a return to realistic valuations, along with a greater recognition of the need to change earlier business practices and to restructure. As the economies in the region continue their recovery, markets should improve. The relative inefficiencies of foreign markets should allow us to achieve superior returns. Overseas markets seem to have become as enamored with a narrow selection of tech stocks as has the U.S. market. This may leave a few bumps in the path to good investment returns in the short run. However, history shows that a return to normal conditions should be very favorable to a value-based approach. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. - -------------------------------------------------------------------------------- COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO FOREIGN FUND CLASS III SHARES AND THE MSCI EAFE INDEX AS OF FEBRUARY 29, 2000
- -------------------------------------------------------------------------------- Average Annual Total Return - -------------------------------------------------------------------------------- Since 1yr 5yr 10yr Inception - -------------------------------------------------------------------------------- 9/30/96 Class II 25.63% n/a n/a 14.04% - -------------------------------------------------------------------------------- Class III 25.65% 14.31% 10.97% n/a - -------------------------------------------------------------------------------- 1/9/98 Class IV 25.74% n/a n/a 17.24% - --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Date Foreign Fund-III MSCI EAFE ---- ---------------- --------- 2/28/90 10000 10000 3/31/90 10130 8958 6/30/90 10829 9814 9/30/90 8782 7733 12/31/90 9216 8548 3/31/91 10004 9183 6/30/91 9417 8682 9/30/91 10389 9426 12/31/91 10354 9584 3/31/92 10375 8447 6/30/92 11111 8626 9/30/92 10074 8756 12/31/92 9876 8418 3/31/93 11069 9427 6/30/93 11765 10375 9/30/93 12927 11063 12/31/93 13942 11158 3/31/94 14480 11549 6/30/94 14744 12139 9/30/94 15101 12150 12/31/94 14851 12026 3/31/95 14738 12250 6/30/95 15685 12340 9/30/95 16585 12854 12/31/95 16908 13374 3/31/96 17392 13760 6/30/96 18034 13978 9/30/96 18070 13961 12/31/96 19327 14183 3/31/97 19509 13961 6/30/97 21852 15773 9/30/97 22726 15662 12/31/97 20653 14434 3/31/98 23342 16558 6/30/98 23119 16733 9/30/98 20133 14353 12/31/98 23535 17318 3/31/99 23611 17558 6/30/99 25731 18004 9/30/99 27091 18796 12/31/99 30351 21988 2/29/00 28348 21145
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period. The Fund commenced operations on June 28, 1996 subsequent to a transaction involving, in essence, the reorganization of the GMO International Equities Pool of the Common Fund for Non-Profit Organizations (the "GMO Pool") as the Foreign Fund. All information relating to the time periods prior to June 28, 1996 relates to the GMO Pool. Performance for Class IV and Class II shares may vary due to different shareholder service fees. Past performance is not indicative of future performance. Information is unaudited. - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of GMO Trust and the Shareholders of GMO Global Hedged Equity Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Global Hedged Equity Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 18, 2000 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ---------------------------------------------------------------------- MUTUAL FUNDS - 85.9% UNITED STATES - 85.9% 176,432 GMO Emerging Markets Fund 1,968,984 318,231 GMO Evolving Countries Fund 3,631,016 653,653 GMO International Core Fund 13,667,889 94,487 GMO International Small Companies Fund 1,090,385 294,217 GMO REIT Fund 2,430,230 88,835 GMO Small Cap Growth Fund 1,498,641 165,411 GMO Small Cap Value Fund 2,052,755 830,657 GMO U.S. Core Fund 13,813,819 ------------ 40,153,719 ------------ TOTAL MUTUAL FUNDS (Cost $41,325,272) 40,153,719 ------------ COMMON STOCKS - 0.0% ITALY - 0.0% 12,500 Grassetto SPA (a) * - ------------ UNITED KINGDOM - 0.0% 17,870 Viglen Technology Plc (Entitlement Letters) * - ------------ TOTAL COMMON STOCKS (Cost $7,040) - ------------ DEBT OBLIGATIONS - 4.0% U.S. GOVERNMENT AGENCY - 4.0% $ 1,900,000 Federal Farm Credit Bank Floating Rate Note, CPI + 3.00%, 5.72% due 2/14/02 (b) 1,843,836 ------------ TOTAL DEBT OBLIGATIONS (Cost $1,856,226) 1,843,836 ------------
1 See accompanying notes to the financial Statements. GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS - CONTINUED (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
PAR VALUE ($) DESCRIPTION VALUE ($) - ---------------------------------------------------------------------- SHORT-TERM INVESTMENTS - 8.4% CASH EQUIVALENTS - 5.4% $ 2,500,000 Banque Nationale Paribas (London) Time Deposit, 5.81% due 3/01/00 2,500,000 ------------ U.S. GOVERNMENT - 3.0% $ 1,500,000 U.S. Treasury Bill, 4.91% due 1/04/01 (b) 1,424,166 ------------ TOTAL SHORT-TERM INVESTMENTS (Cost $3,927,221) 3,924,166 ------------ TOTAL INVESTMENTS - 98.3% (Cost $47,115,759) 45,921,721 ------------ Other Assets and Liabilities (net) - 1.7% 796,710 ------------ TOTAL NET ASSETS - 100.0% $ 46,718,431 ------------ ------------
NOTES TO THE SCHEDULE OF INVESTMENTS: (a) Bankrupt issuer. (b) All or a portion of this security is held as collateral for open futures contracts (Note 6). * Non-income producing security. 2 See accompanying notes to the financial statements. GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES - FEBRUARY 29, 2000 - --------------------------------------------------------------------- ASSETS: Investments, at value (cost $47,115,759) (Note 1) $ 45,921,721 Foreign currency, at value (cost $46,071) (Note 1) 45,348 Cash 16,546 Net receivable for open forward foreign currency contracts (Notes 1 and 6) 1,338,765 Interest receivable 9,507 Receivable for expenses waived or borne by Manager (Note 2) 20,459 ------------ Total assets 47,352,346 ------------ LIABILITIES: Payable for variation margin on open futures contracts (Notes 1 and 6) 575,052 Payable to affiliate for (Note 2): Management fee 18,714 Shareholder service fee 809 Accrued expenses 39,340 ------------ Total liabilities 633,915 ------------ NET ASSETS $ 46,718,431 ------------ ------------ NET ASSETS CONSIST OF: Paid-in capital $ 83,029,403 Accumulated undistributed net investment income 451,652 Accumulated net realized loss (36,536,102) Net unrealized depreciation (226,522) ------------ $ 46,718,431 ------------ ------------ NET ASSETS ATTRIBUTABLE TO CLASS III SHARES $ 46,718,431 ------------ ------------ SHARES OUTSTANDING - CLASS III 6,051,274 ------------ ------------ NET ASSET VALUE PER SHARE - CLASS III $ 7.72 ------------ ------------
See accompanying notes to the financial statements. 3 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS - YEAR ENDED FEBRUARY 29, 2000 - ------------------------------------------------------------------------------ INVESTMENT INCOME: Dividends from investment company shares $ 722,838 Interest 341,886 ------------ Total income 1,064,724 ------------ EXPENSES: Management fee (Note 2) 253,727 Custodian fees 60,044 Transfer agent fees 28,356 Audit fees 23,437 Registration fees 2,808 Legal fees 837 Trustees fees (Note 2) 472 Miscellaneous 1,371 Fees waived or borne by Manager (Note 2) (272,241) ------------ 98,811 Shareholder service fee - Class III (Note 2) 8,662 ------------ Net expenses 107,473 ------------ Net investment income 957,251 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (1,998,040) Realized gain distributions from investment company shares 3,856,688 Closed futures contracts (7,072,490) Closed swap contracts (226,070) Foreign currency, forward contracts and foreign currency related transactions (345,072) ------------ Net realized loss (5,784,984) ------------ Change in net unrealized appreciation (depreciation) on: Investments 5,636,716 Open futures contracts 358,882 Open swap contracts (4,764) Foreign currency, forward contracts and foreign currency related transactions 1,161,325 ------------ Net unrealized gain 7,152,159 ------------ Net realized and unrealized gain 1,367,175 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,324,426 ------------ ------------
4 See accompanying notes tot he financial statements. GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - ----------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 957,251 $ 2,739,761 Net realized loss (5,784,984) (24,490,653) Change in net unrealized appreciation (depreciation) 7,152,159 10,006,930 ------------- ---------------- Net increase (decrease) in net assets resulting from operations 2,324,426 (11,743,962) ------------- ---------------- Distributions to shareholders from: Net investment income - Class III (1,419,125) (2,739,761) In excess of net investment income - Class III - (2,683,188) ------------- ---------------- (1,419,125) (5,422,949) ------------- ---------------- Net share transactions - Class III (Note 5) (4,857,572) (102,868,056) ------------- ---------------- Total increase (decrease) in net assets (3,952,271) (120,034,967) NET ASSETS: Beginning of period 50,670,702 170,705,669 ------------- ---------------- End of period (including accumulated undistributed net investment income of $451,652 and $322,600, respectively) $ 46,718,431 $ 50,670,702 ------------- ---------------- ------------- ----------------
See accompanying notes to the financial statements. 5 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - ------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, -------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- -------- --------- ---------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 7.59 $ 8.72 $ 10.69 $ 10.64 $ 10.12 ---------- -------- --------- ---------- ---------- Income from investment operations: Net investment income (e) 0.16 0.17(c) 0.35 0.24 0.21 Net realized and unrealized gain (loss) 0.20 (0.88) (0.52) 0.01 0.55 ---------- -------- --------- ---------- ---------- Total from investment operations 0.36 (0.71) (0.17) 0.25 0.76 ---------- -------- --------- ---------- ---------- Less distributions to shareholders: From net investment income (0.23) (0.21) (0.35) (0.20) (0.24) In excess of net investment income - (0.21) - - - From net realized gains - - (1.05) - - In excess of net realized gains - - (0.40) - - ---------- -------- --------- ---------- ---------- Total distributions (0.23) (0.42) (1.80) (0.20) (0.24) ---------- -------- --------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 7.72 $ 7.59 $ 8.72 $ 10.69 $ 10.64 ---------- -------- --------- ---------- ---------- ---------- -------- --------- ---------- ---------- TOTAL RETURN (A) 4.74% 8.13% (1.63%) 2.34% 7.54% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 46,718 $ 50,671 $ 170,706 $ 296,702 $ 382,934 Net expenses to average daily net assets (d) 0.21% 0.17% 0.58% 0.91%(b) 0.78% Net investment income to average daily net assets (e) 1.89% 1.99% 2.93% 1.99% 2.44% Portfolio turnover rate 13% 21% 277% 463% 214% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.04 $ 0.05 $ 0.04 $ 0.02 $ 0.005
(a) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .02% of average daily net assets. (c) Computed using average shares outstanding throughout the period. (d) On August 20, 1997, the Fund began to invest a substantial portion of its assets in other funds of GMO Trust and revised its voluntary waiver. Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. (e) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. 6 See accompanying notes to the financial statements. GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 2000 - ------------------------------------------------------------------------------ 1. SIGNIFICANT ACCOUNTING POLICIES GMO Global Hedged Equity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return consistent with minimal exposure to general equity market risk. On August 20, 1997, the Fund began to invest a substantial portion of its assets in other Funds of the Trust ("underlying Funds"). The Fund's benchmark is Salomon Smith Barney 3 Month T-Bill Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying Funds are valued at their net asset value as reported on each business day. Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings, other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies 7 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS - CONTINUED FEBRUARY 29, 2000 - ------------------------------------------------------------------------------- are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, forward foreign exchange contracts and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 29, 2000. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are offset against the proceeds or amounts paid on the future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, 8 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS - CONTINUED FEBRUARY 29, 2000 - ------------------------------------------------------------------------------- security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 29, 2000 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amount paid or offset agianst the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. FUTURES CONTRACTS The Fund may purchase and sell stock index futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian and agency, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into swap agreements to manage its exposure to the equity markets. The Fund enters into total return swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market 9 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS - CONTINUED FEBRUARY 29, 2000 - ------------------------------------------------------------------------------- makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or that there may be unfavorable changes in the price of the security or index underlying these transactions. There were no open swap agreements as of February 29, 2000. TAXES The 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"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to foreign currency transactions and foreign taxes. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Accumulated Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital --------------------------- -------------------------- -------------------------- $590,926 $(635,861) $44,935
10 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS - CONTINUED FEBRUARY 29, 2000 - ------------------------------------------------------------------------------- Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund will also incur fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. (See Note 2). PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .51% of the amount invested. In the case of cash redemptions, the fee is 1.40% of the amount redeemed. The Manager may waive the fee on cash redemptions if it is not necessary to incur costs relating to the early termination of hedging transactions to meet redemption requests. All purchase premiums and redemption fees are paid to and are recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $1,970 in purchase premiums and $17,594 in redemption fees. There is no premium for reinvested distributions. While no purchase premium is normally charged with respect to in-kind purchases of Fund shares, a purchase premium of up to .10% may be charged on certain in-kind purchases. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 11 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS - CONTINUED FEBRUARY 29, 2000 - ------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .50% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. The Fund will invest in Class III shares of each underlying Fund being offered. Like the management fee (as described below), the shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in shares of underlying Funds. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, custodial fees, and the following expenses: brokerage commissions, and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses and transfer taxes ("fund expenses")) plus the amount of fees and expenses, excluding shareholder service fees and fund expenses (as defined above) incurred indirectly by the Fund through investment in underlying Funds exceed the management fee. Because GMO will not reimburse expenses incurred indirectly to the extent they exceed .50%, and because the amount of fees and expenses incurred indirectly by the Fund will vary, the operating expenses (excluding shareholder service fees and fund expenses) incurred indirectly by the Fund through investment in underlying Funds may exceed .50% of the Fund's average daily net assets. For the year ended February 29, 2000, operating expenses (excluding shareholder service fees and fund expenses) incurred indirectly by the Fund were .46% of the Fund's average daily net assets. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .65% of average daily net assets. GMO had agreed to waive a portion of its fee (but not below zero) and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding custody fees, brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses ("fund expenses")) plus the amount of fees and expenses (excluding shareholder service fee and fund expenses (as defined above) incurred indirectly by the Fund through investment in underlying Funds) exceeded .50% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000, was $472. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 12 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS - CONTINUED FEBRUARY 29, 2000 - ------------------------------------------------------------------------------- 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000 aggregated $6,011,095 and $14,267,673, respectively. At February 29, 2000, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation ------------------------- ----------------------------- -------------------------- ---------------------------- $49,432,654 $1,635,726 $5,146,659 $3,510,933
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 59.6% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 --------------------------------------------- --------------------------------------------- Class III: Shares Amount Shares Amount -------------------- --------------------- -------------------- -------------------- Shares sold 48,487 $ 386,191 977,477 $ 8,484,590 Shares issued to shareholders in reinvestment of distributions 144,170 1,121,673 613,717 4,694,941 Shares repurchased (820,134) (6,365,436) (14,483,783) (116,047,587) -------------------- --------------------- -------------------- -------------------- Net decrease (627,477) $ (4,857,572) (12,892,589) $ (102,868,056) -------------------- --------------------- -------------------- -------------------- -------------------- --------------------- -------------------- --------------------
13 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS - CONTINUED FEBRUARY 29, 2000 - ------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FUTURES CONTRACTS
Net Unrealized Number of Appreciation Contracts Type Expiration Date Contract Value (Depreciation) ---------------- --------------------- ----------------------- --------------------- ------------------- Sales 38 MATIF CAC 40 March 2000 $ 2,272,264 $ (227,064) 14 DAX March 2000 2,590,568 (505,179) 40 FTSE 100 March 2000 3,946,623 280,121 5 HANG SENG March 2000 546,076 (15,470) 5 IBEX March 2000 604,800 (756) 5 MIB30 March 2000 1,196,699 (257,816) 43 OMX March 2000 706,040 (30,757) 12 ALL ORDS March 2000 577,792 (1,357) 65 S&P 500 March 2000 22,295,000 850,468 38 TOPIX March 2000 5,980,793 (462,502) ------------------- $ (370,312) ------------------- -------------------
At February 29, 2000, the Fund had cash and/or securities to cover any margin requirements on open futures contracts. FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) --------------- --------------------- ----------------------- -------------------- --------------------- Buys 04/07/00 AUD 309,262 $ 190,007 $ (9,993) 03/03/00 CHF 2,569,738 1,540,411 (55,356) 09/08/00 CHF 35,563 21,733 (570) 03/03/00 DKK 1,413,740 183,292 (4,822) 03/03/00 EUR 9,827,102 9,461,695 (423,181) 03/03/00 GBP 4,195,153 6,622,654 (89,803) 09/08/00 GBP 303,841 479,725 (9,528) 04/07/00 HKD 778,200 99,982 (18) 04/07/00 JPY 126,982,000 1,162,908 (87,092) 03/03/00 NOK 790,000 94,177 (1,930) 03/03/00 SEK 4,130,378 471,153 (7,609) -------------------- $ (689,902) -------------------- --------------------
14 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS - CONTINUED FEBRUARY 29, 2000 - ------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS - CONTINUED
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) --------------- ---------------------- ----------------------- --------------------- ------------------- Sales 04/07/00 AUD 1,106,549 $ 679,851 $ 39,140 03/03/00 CHF 2,569,738 1,540,411 156,996 09/08/00 CHF 1,661,660 1,015,473 31,902 03/03/00 DKK 1,413,740 183,292 19,481 09/08/00 DKK 1,413,740 185,290 4,882 03/03/00 EUR 9,827,102 9,461,695 877,301 09/08/00 EUR 7,126,910 6,954,779 285,669 03/03/00 GBP 4,195,153 6,622,654 122,755 09/08/00 GBP 2,337,495 3,690,607 30,521 04/07/00 HKD 4,033,339 518,200 (804) 04/07/00 JPY 666,613,710 6,104,885 405,721 03/03/00 NOK 790,000 94,177 7,170 09/08/00 NOK 790,000 94,342 1,917 03/03/00 SEK 4,130,378 471,153 32,551 09/08/00 SEK 4,130,378 475,882 7,769 04/07/00 SGD 341,040 198,520 5,696 -------------------- $ 2,028,667 -------------------- --------------------
Currency Abbreviations: AUD Australian Dollar HKD Hong Kong Dollar CHF Swiss Franc JPY Japanese Yen DKK Danish Krona NOK Norwegian Kroner EUR Euro SEK Swedish Krona GBP British Pound SGD Singapore Dollar 15 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION - (UNAUDITED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- The Fund has elected to defer to March 1, 2000 post-October capital losses of $1,664,035. At February 29, 2000, the Fund had a capital loss carryforward available to offset future capital gains, if any, of the following amounts:
YEAR OF EXPIRATION AMOUNT ------------------ ------ 2007 $10,447,067 2008 $21,237,637
16 GMO GLOBAL HEDGED EQUITY FUND (A Series of GMO Trust) PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham has been with GMO since its founding in 1977. Mr. Darnell has been with GMO and involved in portfolio management for more than 15 years. Mr. Berkley has been with GMO and involved in portfolio management for more than 10 years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the Global Hedged Equity Fund returned 4.7% for the fiscal year ending February 29, 2000. During that period the Fund's benchmark, the Salomon Smith Barney 3 Month T-Bill, returned 4.8%. The Fund's objective is to outperform the Salomon Smith Barney 3 Month T-Bill Index by adding the alpha (value added) of our U.S. and international equity funds, as well as the value added of our asset allocation strategy, to a short-term fixed income return. As of February 29, 2000, the Fund held 42% of its assets in long U.S. equities, 32% in developed international equities and 12% in emerging markets equities. The remaining 14% of the Fund was invested in U.S. Treasuries and cash holdings. The long equity exposure is hedged, using short EAFE futures and short international equity swaps combined to represent the GMO EAFE Index as well as short S&P 500 futures, totaling approximately 100% of the value of the long assets. The Fund currently invests in the GMO U.S. Core Fund, GMO REIT Fund, GMO Small Cap Growth Fund, GMO Small Cap Value Fund, GMO Evolving Countries Fund, GMO Emerging Markets Fund, GMO International Small Companies Fund and GMO International Core Fund. The GMO Global Hedged Equity Fund's performance for the fiscal year was hurt by the poor performance of the GMO International Core Fund relative to EAFE. For the fiscal year, the GMO International Core Fund returned 8.2%, trailing its hedge by 17.5%. Returns for the Fund relative to the benchmark were hurt by the Fund's value orientation relative to a market that favored large, technology-oriented international stocks. The emerging markets position positively affected the relative performance of the GMO Global Hedged Equity Fund. The 12% weight in emerging markets was hedged half with short S&P 500 futures and half with short EAFE futures and international equity swaps. Emerging markets outperformed by almost 70% for the year, adding substantial value for the Fund. For the fiscal year, the U.S. equity funds held long by the Fund as a group returned 13.7%, versus the S&P 500 return of 11.7%. The GMO U.S. Core Fund, which accounts for the majority of the U.S. equity holdings, outperformed the S&P 500 Index by 2.0%. Diversification into the GMO Small Cap Value, Small Cap Growth and REIT Funds was a wash, as extremely strong returns in Small Cap Growth (+67.3%) were counteracted by the underperformance of REITs (-4.7%) and Small Cap Value (+10.7%), leading to overall returns equal to the return of U.S. Core. The 14% Treasury position was enhanced with bond futures for most of the fiscal year. As interest rate spreads narrowed, this exposure subtracted a modest amount of value for the period. OUTLOOK GMO's global equity alpha is positioned to benefit as the extremes of the current market environment work their way out of the system. Our expectation is that emerging equities will continue their rebound and outperform developed markets. Long positions in global small value stocks and REITs, with their extremely cheap valuations, also look likely to add value relative to overpriced large cap equities. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO GLOBAL HEDGED EQUITY FUND CLASS III SHARES AND THE SALOMON SMITH BARNEY 3 MONTH T-BILL INDEX AS OF FEBRUARY 29, 2000 Average Annual Return Since Inception 1yr 5yr 7/29/94 Class III 2.75% 0.44% 0.73% [LINE GRAPH APPEARS HERE]
Date GMO Global Hedged Equity Fund-III Salomon Smith Barney 3 Mo. T-Bill ---- ---------------------------------- ---------------------------------- 7/29/94 9,949 10,000 9/30/94 9,969 10,075 12/31/94 9,990 10,206 3/31/94 10,091 10,349 6/30/95 10,421 10,500 9/30/95 10,598 10,648 12/31/95 10,793 10,793 3/31/96 10,845 10,932 6/30/96 10,906 11,071 9/30/96 11,012 11,215 12/31/96 11,235 11,360 3/31/97 11,068 11,504 6/30/97 11,036 11,653 9/30/97 11,348 11,804 12/31/97 11,055 11,957 3/31/98 11,068 12,110 6/30/98 10,615 12,265 9/30/98 10,489 12,417 12/31/98 10,273 12,559 3/31/99 10,126 12,697 6/30/99 10,937 12,839 9/30/99 10,787 12,984 12/31/99 10,442 13,145 2/29/00 10,417 13,260
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expensess not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 51 bp on the purchase and 140 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of GMO Trust and the Shareholders of GMO International Core Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO International Core Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 13, 2000 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ------------------------------------------------------------------------------------------------- COMMON STOCKS - 94.6% AUSTRALIA - 2.7% 625,600 Amcor Ltd 2,305,273 408,275 Australia and New Zealand Banking Group Ltd 2,509,928 780,583 Boral Ltd * 1,116,990 265,969 Caltex Australia Ltd 351,191 1,179,500 Colonial Ltd 4,476,730 1,349,596 CSR Ltd 2,942,433 355,000 Email Ltd 449,128 264,828 General Property Trust Units 416,369 2,587,531 Goodman Fielder Ltd 1,859,285 166,000 Jupiters Ltd 265,067 424,273 National Food Ltd 687,898 834,600 National Mutual Holdings 1,178,910 1,279,507 News Corp Ltd 18,650,390 780,583 Origin Energy Ltd 598,764 662,760 Pacific Dunlop Ltd 655,325 608,817 Pioneer International Ltd 1,622,748 388,921 PMP Communications Ltd 503,986 2,190,379 Qantas Airways Ltd 4,788,988 474,892 Santos Ltd 1,117,038 977,139 Schroders Property 1,392,255 880,767 Western Mining Corp Holdings Ltd 3,310,449 1,889,208 Westfield Trust Units 3,573,592 454,991 Westpac Banking Corp 2,906,100 ----------------- 57,678,837 ----------------- AUSTRIA - 3.7% 2,023 Austria Mikro Systeme International * 89,981 36,503 Austria Tabakwerke AG 1,454,931 86,676 Austrian Airlines 1,360,191 408,277 Bank Austria AG 17,766,704 101,377 Boehler Uddeholm (Bearer) 3,776,171 82,962 Brau Union AG 3,447,261 18,385 EA-Generali AG 2,858,399 17,706 Energie-Versorgung Niederoesterreich AG 1,892,156 167,454 Erste Bank Der Oesterreichischen Sparkassen AG 7,012,911 58,727 Flughafen Wien AG 2,114,574 7,655 Interunfall Versicherung AG 972,820 9,192 Leykam-Muerztaler Papier und Zellstoff AG 273,453 See accompanying notes to the financial statements. 1 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- AUSTRIA - CONTINUED 37,452 Mayr-Melnhof Karton AG (Bearer) 2,058,129 44,545 Oesterreichische Brau Beteiligungs AG 1,719,717 26,763 Oesterreichische Elektrizitaetswirtschafts AG * 3,156,345 44,898 OMV AG 3,514,669 209,276 RHI AG 5,667,646 644,898 Voest-Alpine Stahl AG 19,868,018 ----------------- 79,004,076 ----------------- BELGIUM - 0.9% 17,600 Almanij NV 667,609 7,650 Arbed SA 710,726 18,500 Bekaert SA 816,629 36,302 Compagnie Benelux Paribas SA 1,950,196 2,050 Compagnie Maritime Belge SA 88,814 23,779 Credit Commercial Dexia 3,239,392 2,466 Electrabel SA 666,422 23,800 Electrafina NPV 3,010,827 3,550 Glaverbel NPV 239,243 17,100 Groupe Bruxelles Lambert NPV 3,709,120 34,118 Solvay et Cie 2,374,846 30,900 Union Miniere NPV 1,011,465 ----------------- 18,485,289 ----------------- CANADA - 0.7% 45,200 Bank of Montreal 1,383,101 139,899 Boliden Ltd SDR * 314,362 39,650 Donohue Inc Class A 907,223 40,807 Fletcher Challenge Ltd Class A 478,097 75,010 Hudsons Bay Co 710,812 176,980 Methanex Corp * 381,769 52,700 NS Power Holdings Inc 472,157 41,720 PanCanadian Petroleum Ltd 618,181 31,000 Potash Corp of Saskatchewan 1,410,062 59,100 Quebecor Inc Class B 2,154,645 48,254 Rogers Cantel Mobile Communications Class B * 2,311,270 83,960 Stelco Inc Class A 448,442 322,074 Transcanada Pipelines Ltd 2,197,473 81,600 Westcoast Energy Inc 1,180,979 ----------------- 14,968,573 ----------------- 2 See accompanying notes to the financial statements. GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- DENMARK - 0.1% 7,570 Den Danske Bank 723,289 5,920 Kapital Holding AS 217,966 34,400 Topdanmark AS * 561,924 10,890 Unidanmark AS Class A (Registered) 621,197 ----------------- 2,124,376 ----------------- FINLAND - 1.1% 41,700 Amer Group Class A 1,083,960 309,500 Enso Oyj Class R 3,128,697 82,500 Finnair Class A 350,273 138,600 Fortum Oyj 617,814 5,400 Helsingin Puhelin Oyj 577,072 26,238 Instrumentarium Oyj 855,072 171,800 Kesko Oyj 2,274,256 19,950 Kone Oyj 979,550 25,200 Metra AB Class A 513,127 6,200 Metra AB Class B 127,141 38,500 Outokumpu Class A 429,964 83,800 Partek Oyj 1,097,227 9,000 Pohjola Group Insurance Class B 506,021 185,901 Rautaruukki Oyj 1,020,164 45,800 Sampo Insurance Co Ltd Class A 1,565,335 2,921 Sanitec Oyj * 38,527 9,400 Sonera Oyj 724,893 42,250 Stockmann AB Class A 667,089 19,400 Stockmann AB Class B 298,838 7,800 Tieto Corp 536,926 222,400 UPM-Kymmene Oyj 6,166,529 ----------------- 23,558,475 ----------------- FRANCE - 11.3% 42,220 Air France * 653,609 19,210 Alcatel Alsthom Cie Generale d'Electricite SA 4,497,845 217,801 Assurances Generales de France (Bearer) 10,526,333 376,020 Aventis SA Class A 19,186,703 382,284 Banque Nationale de Paris 30,179,602 4,427 Bongrain 1,231,745 40,902 Christian Dior 8,367,910 91,904 Compagnie Generale d'Industrie et de Participations 6,171,520 456,381 Credit Lyonnais SA * 15,466,204 See accompanying notes to the financial statements. 3 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- FRANCE - CONTINUED 13,002 Dexia * 1,777,510 32,472 Dexia Strip * 1,563 106,255 Eridania Beghin-Say SA 8,920,299 320,300 Eurotunnel SA Units (Bearer) * 394,712 1,004 Fromageries Bel SA 680,487 23,752 Groupe Danone 4,774,679 27,010 Imetal 3,198,477 2,040 Labinal SA 167,923 45,829 Lafarge Coppee SA 3,419,445 86,900 Michelin SA Class B 2,713,190 47,060 Pechiney SA Class A 2,745,605 110,464 Pernod Ricard 5,583,334 108,465 Peugeot SA 22,357,324 87,741 Remy Cointreau SA * 1,858,398 463,370 Renault SA 18,468,932 61,670 Rhodia SA 1,050,898 92,702 Saint-Gobain 12,896,459 4,410 Seb SA 318,430 5,390 Skis Rossignol 79,136 14,863 Societe Eurafrance 6,954,346 165,893 Societe Generale Paris 34,386,313 15,260 SPIE Batignolles 984,335 6,139 Suez Lyonnaise des Eaux 1,010,665 22,783 Thomson CSF 899,308 443,216 Usinor Sacilor 6,464,599 ----------------- 238,387,838 ----------------- GERMANY - 10.2% 113,545 AGIV AG 2,033,267 43,600 Bankgesellschaft Berlin AG * 690,504 510,400 BASF AG 23,267,203 398,349 Bayer AG 16,586,829 18,050 Bayerische Hypotheken und Wechsel-Bank AG 295,420 32,050 Bayerische Motoren Werke AG 820,773 26,787 Bayerische Vereinsbank 1,459,668 176,780 Berliner Kraft & Licht AG Class A 1,667,910 207,550 Commerzbank AG 7,393,294 303,197 Continental AG 4,991,540 62,400 DaimlerChrysler AG 4,229,322 4 See accompanying notes to the financial statements. GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- GERMANY - CONTINUED 121,256 Deutsche Bank AG 10,203,007 399,934 Deutsche Telekom 33,459,668 97,300 Douglas Holdings AG 2,988,251 19,649 Dresdner Bank AG 942,070 44,328 FAG Kugelfischer 371,288 19,500 Fresenius Medical Care AG 1,370,475 79,697 Heidelberg Port-Zement 4,488,605 181,963 Klockner Humboldt Deutz * 895,195 1,500 Leirheit AG 45,490 73,000 Linde AG 3,004,502 108,500 MAN AG 3,614,260 450 Phoenix AG 4,462 9,359 Schering AG 1,125,396 10,900 Schwarz Pharma AG 274,942 349,471 Siemens AG 62,412,070 253,349 SKW Trostberg 1,512,253 24,700 Suedzucker AG 249,689 472,070 Thyssen Krupp AG * 11,384,859 295,052 Veba AG 13,180,445 ----------------- 214,962,657 ----------------- HONG KONG - 4.6% 3,013,000 Cathay Pacific Airways Ltd 4,181,066 1,746,000 Cheung Kong Holdings 23,443,619 1,694,122 Chinese Estates Holdings Ltd * 285,154 356,000 Citic Pacific Ltd 1,788,508 1,331,000 CLP Holdings Ltd 5,865,922 134,300 Dao Heng Bank 503,875 766 Dickson Concept International Ltd 837 300 Elec & Eltek International Holdings Ltd 56 525,128 Great Eagle Holdings Ltd 701,718 200,700 Guoco Group 398,419 2,031,700 Hang Lung Development Co Ltd 1,579,353 2,358,000 Henderson Investment Ltd 1,605,772 566,000 Henderson Land Development Co Ltd 2,407,180 1,099,200 Hong Kong Aircraft Engineering Co Ltd 1,504,148 1,923,300 Hong Kong Electric Holdings Ltd 5,869,144 598,700 Hong Kong Ferry Co Ltd 484,634 2,074,421 Jardine Matheson Holdings Ltd 7,260,474 See accompanying notes to the financial statements. 5 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- HONG KONG - CONTINUED 3,611,911 Jardine Strategic Holdings Ltd 5,706,819 622 Kumagai Gumi Ltd 149 2 Leading Spirit Holdings - 700 Lai Sun Garment International Ltd * 34 2,433,462 Mandarin Oriental ADR 1,253,233 1,314,800 New Asia Realty & Trust Class A 1,351,493 1,142,000 New World Development Co Ltd 1,643,419 200 Paul Y ITC Construction Holdings Ltd 17 42,000 Realty Development Corp Ltd Class A 53,426 34,291,371 Regal Hotels International Ltd * 2,511,446 3,756,000 South China Morning Post Ltd 3,740,171 1,801,000 Sun Hung Kai Properties Ltd 16,256,392 688,000 Swire Pacific Ltd Class A 3,297,322 454,000 Wharf Holdings Ltd 778,756 2,999,800 Wheelock and Co Ltd 2,004,286 404 Wing Lung Bank 1,448 880,200 Yue Yuen Industrial Holdings 1,690,778 ----------------- 98,169,068 ----------------- ITALY - 3.7% 132,656 Banca Commerciale Italiana SPA 561,944 9,280,000 Banca di Roma 10,551,432 1,100,918 Banca Intesa SPA 4,038,253 169,000 Banca Popolare di Bergamo Credit 3,359,853 537,000 Banca Popolare di Milano 3,980,875 2,142,000 Banco Ambrosiano Veneto SPA (Non Convertible) 4,433,753 950,000 Banco di Napoli 915,527 154,206 Beni Stabili SPA * 82,990 254,300 Burgo (Cartiere) SPA 1,493,447 2,076,700 Dalmine SPA * 554,818 18,650 Ericsson SPA 1,166,196 203,600 Falck Acciaierie and Ferriere Lombarde 1,538,725 369,390 Fiat SPA 11,237,915 159,672 Fiat SPA (Non Convertible) 2,299,714 588,000 Grassetto SPA (c) * 3 693,570 HPI SPA 1,469,016 219,500 IFIL Finanziaria di Partecipazioni SPA 2,347,805 381,925 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 1,739,213 215,000 Immsi SPA * 492,639 30,800 Industrie Natuzzi SPA ADR 348,425 6 See accompanying notes to the financial statements. GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- ITALY - CONTINUED 274,650 Italcementi Fabbriche Riunite Cemento SPA (Non Convertible) 899,026 37,300 Italmobiliare SPA 800,806 187,470 Magneti Marelli SPA 712,923 3,316,481 Montedison SPA 5,827,119 973,728 Montedison SPA (Non Convertible) 1,019,953 1,045,000 Parmalat Finanziaria SPA 1,135,857 766,975 Pirelli & Co 1,709,408 716,819 RAS SPA 6,245,563 101,206 San Paolo IMI SPA 1,597,952 215,000 Sirti SPA 507,129 982,472 SMI (Societa Metallurgica Italy) 695,218 345,000 SNIA BPD SPA 398,246 88,000 Societa Assicuratrice Industriale (SAI) 349,055 137,000 Sorin Biomedica SPA 568,475 324,329 Telecom Italia SPA (Non Convertible) 2,560,432 36,500 Toro Assicurazioni 379,165 ----------------- 78,018,870 ----------------- JAPAN - 24.1% 10,000 Acom Ltd 1,061,399 371,000 Amada Co Ltd 2,502,490 981,000 Asahi Bank 4,152,428 183,000 Ashikaga Bank Ltd * 333,166 37,000 Autobacs Seven 889,172 86,000 Bandai Co 3,295,799 458,000 Bank of Yokohama 1,634,300 72,000 Best Denki Co Ltd 505,321 86,000 Brother Industries Ltd 183,970 257,000 Canon Sales Co Inc 3,392,199 133,000 Chiba Bank 573,866 184,700 Chubu Electric Power Co Inc 2,624,521 44,000 Chudenko Corp 521,087 111,200 Chugoku Electric Power Co Inc 1,376,651 1,502,000 Cosmo Oil Co Ltd 1,640,708 656,000 Daicel Chemical Industries Ltd 2,179,600 145,000 Daido Steel Co Ltd 197,988 372,000 Dai-Ichi Kangyo Bank 2,946,065 225,000 Daiichi Pharmaceuticals Co Ltd 2,918,620 147,000 Daikyo Inc * 271,640 350,000 Dainippon Pharmaceutical Co Ltd 2,724,045 See accompanying notes to the financial statements. 7 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- JAPAN - CONTINUED 76,000 Dainippon Printing Co Ltd 1,138,046 98,000 Dainippon Screen Manufacturing Co Ltd * 581,639 107,000 Daio Paper Corp 610,705 44,000 Daishowa Paper Manufacturing * 193,455 145,200 Daito Trust Construction Co Ltd 1,890,091 3,652,000 Daiwa Bank 9,075,563 1,109,000 Daiwa House Industry Co Ltd 7,581,439 105,000 Daiwa Kosho Lease Co Ltd 258,067 656,000 Daiwa Securities Co Ltd 10,420,281 260,000 Ezaki Glico Co Ltd 1,202,312 1,414,000 Fuji Bank 11,018,015 247,600 Fuji Photo Film Co Ltd 10,886,241 955,000 Fujita Corp * 434,664 216,000 Fukuyama Transporting Co Ltd 1,539,557 258,000 General Sekiyu (KK) 469,710 219,000 Gunze Ltd 558,190 127,500 Heiwa Corp 2,425,698 229,000 Hino Motors * 554,495 2,600,300 Hitachi Ltd 35,481,769 54,000 Hitachi Maxell Ltd 1,359,155 540,000 Hitachi Metals Ltd 2,910,018 183,200 Hokkaido Electric Power 2,197,966 113,000 Hokuetsu Paper Mills 658,322 72,000 Hokuriku Bank * 148,778 127,000 Honda Motor Co Ltd 4,161,850 221,000 House Foods Corp 3,218,788 6,000 Hyogo Bank Ltd (c) * 1 92,000 INAX Corp 468,144 377,000 Industrial Bank of Japan 2,947,913 756,000 Ishikawajima-Harima Heavy Industries 770,761 1,201,000 Itochu Corp * 6,559,556 98,000 Itoham Foods Inc 383,597 42,000 JACCS Co 148,341 107,000 Japan Airport Terminal Co Ltd 839,598 173,000 Japan Radio Co 1,795,276 173,000 Japan Securities Finance Co 1,014,173 124,000 Japan Steel Works Ltd * 104,975 374,000 Japan Synthetic Rubber Co Ltd 2,893,815 8 See accompanying notes to the financial statements. GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- JAPAN - CONTINUED 1,265 Japan Tobacco Inc 9,039,416 204,000 JGC Corp * 492,103 844,000 Kajima Corp 2,151,199 237,000 Kamigumi Co Ltd 927,677 188,000 Kandenko Co 677,693 38,600 Kansai Electric Power 565,709 28,000 Katokichi Co Ltd 569,660 801,000 Kawasaki Heavy Industries Ltd 838,514 460,000 Kawasaki Kisen 632,288 701,000 Keio Teito Electric Railway Co Ltd 2,348,259 76,000 Kinden Corp 471,130 86,000 Kirin Brewery Co Ltd 1,026,317 157,000 Kissei Pharmaceutical Co Ltd 2,643,940 2,196,000 Kobe Steel Ltd * 1,259,369 21,000 Kokusai Denshin Denwa 1,959,401 157,000 Kokusai Electric 2,060,844 506,000 Komatsu Ltd 2,238,551 140,000 Konica Corp 627,008 32,000 Koyo Seiko Co Ltd 250,221 818,000 Kubota Corp 2,382,777 806,000 Kumagai Gumi Co Ltd * 418,206 78,000 Kyowa Hakko Kogyo Co Ltd 1,015,338 470,000 Kyushu Electric Power Co Inc 5,587,547 452,000 Maeda Corp 1,275,500 110,000 Maeda Road Construction 445,587 102,000 Makita Corp 840,289 2,145,000 Marubeni Corp 8,728,005 41,000 Marui Co Ltd 537,436 32,000 Maruichi Steel Tube 328,579 382,000 Matsushita Electric Industrial Co Ltd 11,127,395 44,000 Misawa Homes 136,180 401,000 Mitsubishi Corp 2,960,366 1,950,000 Mitsubishi Electric Corp 17,271,403 179,000 Mitsubishi Gas Chemical Co Inc 329,143 4,618,000 Mitsubishi Heavy Industries 12,653,207 830,000 Mitsubishi Material * 2,757,726 723,000 Mitsubishi Motors * 2,296,910 102,000 Mitsubishi Paper Mills Ltd 110,491 See accompanying notes to the financial statements. 9 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- JAPAN - CONTINUED 191,000 Mitsubishi Trust & Banking 1,303,992 155,000 Mitsui Fudosan Co Ltd 1,244,459 954,000 Mitsui Petrochemical Industries Ltd 6,886,550 3,692,000 Mitsui Trust & Banking Co Ltd 5,713,349 58,000 Mitsui-Soko 125,129 630,000 Mycal Corp 2,282,463 49,000 Nagase & Co 167,266 208,000 Nagoya Railroad Co Ltd 566,128 38,000 National House Industrial 183,678 371,000 New Japan Securities Co Ltd * 1,705,475 169,000 New Oji Paper Co Ltd 810,732 57,000 Nichicon Corp 1,691,502 26,000 Nichiei Co Ltd (Kyoto) * 525,420 467,000 Nichirei 1,186,045 132,000 Nikko Securities 1,702,644 363,000 Nippon Express Co Ltd 2,425,397 66,000 Nippon Hodo Co 273,961 44,000 Nippon Kayaku Co Ltd 192,253 326,000 Nippon Light Metal 207,728 150,000 Nippon Meat Packers Inc 1,379,091 3,127,975 Nippon Oil Co Ltd 10,990,837 54,000 Nippon Paint Co 130,263 104,000 Nippon Paper Industries 536,780 576,000 Nippon Shinpan Co 1,310,819 232,000 Nippon Suisan Kaisha Ltd 348,459 342,000 Nishimatsu Construction 1,039,807 4,894,000 Nissan Motor Co * 18,488,098 271,000 Nisshin Oil Mills Ltd 727,732 588,000 Nisshin Steel Co Ltd 545,956 1,001,000 Nisshinbo Industries Inc 3,763,261 2,373,000 Nissho Iwai Corp * 1,620,090 6,437,000 NKK Corp * 3,515,725 56,000 NOF Corp 126,421 163,000 Obayashi Corp 462,938 509,000 Oki Electric Industry * 3,044,131 339,000 Okumura Corp 925,766 220,000 Omron Corp 6,067,999 44,000 Ono Pharmaceutical Co Ltd 1,241,637 10 See accompanying notes to the financial statements. GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- JAPAN - CONTINUED 650,000 Onoda Cement Co Ltd 982,204 125,000 Onward Kashiyama Co Ltd 1,207,273 298,000 Orient Corp 1,095,917 64,000 Penta Ocean Construction * 79,814 86,000 Promise Co 6,348,914 200,000 Q.P. Corp 1,511,083 900,000 Renown Inc 1,327,204 58,500 Rinnai Corp 974,512 166,000 Royal Co Ltd 1,344,864 83,000 Ryosan Co 1,359,219 256,000 Sagami Railway Co Ltd 652,496 4,804,000 Sakura Bank Ltd 27,418,943 216,000 Sankyo Co Ltd 4,473,169 83,000 Sanwa Shutter Corp 213,063 754,000 Sanyo Electric Co 3,074,890 500 Secom Co Ltd 44,786 636,000 Seino Transportation Co Ltd 3,189,987 762,000 Sekisui Chemical 2,386,127 1,349,000 Sekisui House Ltd 10,069,455 326,200 Shikoku Electric Power 3,934,414 478,000 Shimizu Corp 1,153,065 435,000 Shionogi and Co Ltd 6,216,831 620,000 Showa Denko * 790,132 383,000 Showa Shell Sekiyu 1,296,946 379,000 Snow Brand Milk Products Co Ltd 1,590,451 251,000 Stanley Electric Co Ltd 1,937,536 920,000 Sumitomo Corp 10,200,355 74,000 Sumitomo Electric 975,395 116,000 Sumitomo Forestry Co Ltd 687,415 2,132,000 Sumitomo Metal Industries * 1,164,444 1,516,000 Sumitomo Trust & Banking 8,569,806 365,000 Suzuki Motor Corp 5,904,192 778,000 Taisei Corp 1,140,212 123,000 Takara Standard Co 448,983 163,000 Takuma Corp 1,121,733 401,000 Tanabe Seiyaku Co Ltd 2,438,378 900 TDK Corp 86,104 1,140,000 Teikoku Oil Co Ltd 3,248,100 See accompanying notes to the financial statements. 11 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- JAPAN - CONTINUED 219,000 Toei Co Ltd 1,991,543 382,700 Tohoku Electric Power Co Inc 4,528,788 974,000 Tokai Bank 4,459,715 98,000 Tokuyama Corp 355,050 264,000 Tokyo Electric Co Ltd 1,285,695 145,000 Tokyo Ink Manufacturing Co Ltd 266,624 384,400 Tokyo Steel Manufacturing Co 864,292 71,000 Tokyo Style Co Ltd 581,676 522,000 Tomen Corp 308,862 105,000 Toppan Printing Co Ltd 1,035,137 179,000 Toray Industries Inc 570,297 129,000 Tostem Corp 1,779,027 259,000 Toyo Seikan Kaisha 3,383,232 126,000 Toyo Suisan Kaisha 779,937 498,000 Toyo Trust & Banking Co Ltd 1,427,973 1,238,000 Toyobo Co Ltd 1,634,063 90,000 Victor Co of Japan Ltd 525,966 92,000 Wacoal Corp 661,599 115,000 Yakult Honsha Co Ltd 964,135 53,000 Yamaha Corp 363,288 188,000 Yamazaki Baking Co Ltd 1,567,594 3,556,000 Yasuda Trust & Banking * 4,531,792 200 Yoshitomi Pharmaceutical Industries Ltd 2,740 ----------------- 506,794,801 ----------------- LUXEMBOURG - 0.0% 14,080 Carrier1 International SA ADR * 456,720 ----------------- MALAYSIA - 0.0% 511,000 MBF Holdings Berhad * 27,567 751,000 Promet Berhad * 57,313 36,540 Silverstone * 433 234,000 Westmont Industries Berhad (c) * 616 ----------------- 85,929 ----------------- NETHERLANDS - 2.3% 203,700 ABN Amro Holdings NV 4,216,412 19,300 Buhrmann NV Maastricht 508,192 110,200 DSM NV 3,614,658 244,000 Fortis (NL) NV 6,126,479 7,100 Gamma Holdings NV 237,876 12 See accompanying notes to the financial statements. GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- NETHERLANDS - CONTINUED 86,700 ING Groep NV 4,383,867 73,450 KLM-Konin Luchtvaart Mij NV 1,368,316 144,350 Kon Bolswessanen 1,556,497 56,100 Koninklijke KPN NV 7,132,057 27,100 Koninklijke Volker Wessels 430,494 27,200 Nedlloyd 623,246 327,900 Royal Dutch Petroleum 17,138,578 45,700 Stork NV 560,970 18,800 VIB NV 459,732 4,200 Wereldhave NV 170,436 ----------------- 48,527,810 ----------------- NEW ZEALAND - 0.1% 224,600 Air New Zealand Class B 229,038 3,300,200 Brierley Investment Ltd 592,954 902,200 Carter Holt Harvey Ltd 871,836 108,400 Fletcher Challenge Energy 237,003 62,800 Fletcher Challenge Energy 135,706 524,900 Lion Nathan Ltd 945,647 ----------------- 3,012,184 ----------------- NORWAY - 3.0% 195,100 Bergesen d.y. ASA Class A 3,256,124 88,100 Bergesen d.y. ASA Class B 1,444,090 1,104,000 Christiania Bank OG Kreditkasse 5,593,372 3,060,637 Den Norske Bank Class A 11,091,776 17,300 Dyno Industrier AS 412,469 71,300 Elkem AS Class A 1,232,461 259,600 Fred Olsen Energy * 2,104,405 44,650 Kvaerner ASA Class B * 620,102 316,150 Kvaerner ASA * 5,464,833 28,200 Leif Hoegh and Co AS 273,982 432,550 Norsk Hydro AS 16,113,951 80,700 Norske Skogindustrier ASA Class A 3,107,361 29,550 Norske Skogindustrier ASA Class B 900,045 82,000 Orkla ASA 1,251,237 546,200 Petroleum Geo-Services * 8,562,353 126,100 SAS Norge ASA Class B 1,119,920 20,700 Smedvig ASA Class A 264,040 286,800 Tandberg Data ASA * 550,454 ----------------- 63,362,975 ----------------- See accompanying notes to the financial statements. 13 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- PORTUGAL - 0.4% 83,084 Banco Espirito Santo e Commercial de Lisboa (Registered) 2,157,307 360,884 Electricidade de Portugal 7,202,453 ----------------- 9,359,760 ----------------- SINGAPORE - 5.0% 461 Asia Food & Properties Ltd * 156 318,000 Cerebos Pacific Ltd 564,530 560,000 City Developments Ltd 2,274,178 3,366,000 Comfort Group 1,503,638 366,950 Creative Technology Ltd 7,983,190 664,748 DBS Group Holdings Ltd 8,214,383 6,568,096 DBS Land Ltd 8,687,857 189,309 First Capital Corp Ltd 141,677 37 Hai Sun Hup Group Ltd 16 1,067,203 Haw Par Brothers International Ltd 1,820,257 1,585,104 Hotel Properties Ltd 1,397,783 634,000 Keppel Bank Ltd 1,302,060 553,000 Keppel Corp 1,238,371 949,000 Keppel Land Ltd 1,084,603 189,000 Natsteel Ltd 374,996 556 Neptune Orient Lines Ltd * 455 1,235,850 Oversea-Chinese Banking Corp 7,815,029 2,233,776 Overseas Union Bank 9,913,782 508 Prima Ltd 1,303 694,308 Robinson and Co Ltd 1,997,893 761,166 Shangri-La Asia Ltd 621,037 3,161,000 Singapore Airlines Ltd (Registered) 29,341,533 651,000 Singapore Land Ltd 1,201,009 430,759 Singapore Press Holdings 8,246,822 390,000 Singapore Telecom 633,521 1,913,168 Straits Trading Co Ltd 1,997,855 519,000 Times Publishing Ltd 1,059,860 4,515,960 United Industrial Corp Ltd 1,964,942 236,400 United Overseas Bank 1,494,901 1,012,000 United Overseas Land 710,402 2,805,000 Wing Tai Holdings 2,099,234 ----------------- 105,687,273 ----------------- SPAIN - 1.5% 6,620 Cristaleria Espanola SA 231,227 480,900 Endesa 10,171,813 1,120,753 Repsol SA 21,202,447 ----------------- 31,605,487 ----------------- 14 See accompanying notes to the financial statements. GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- SWEDEN - 4.8% 324,634 Assi Doman 4,776,752 913,758 Avesta Sheffield AB * 3,585,408 5,100 Custos AB Class B 126,816 31,600 Drott AB Class B 309,981 53,788 Esselte AB Class A 306,764 181,400 Esselte AB Class B 1,106,981 316,500 Foreningssparbanken AB Class A 4,007,243 354,102 Gambro AB Class A 2,463,810 295,346 Gambro AB Class B 2,088,679 37,596 Industrivarden AB Class A 1,035,638 53,000 Investor AB Class B 773,811 579,223 Mo Och Domsjo AB Class B 16,385,001 1,739,200 Nordbanken Holdings AB 9,125,493 9,600 PerBio Science AB * 65,701 19,200 Perstorp AB Class B 181,773 31,200 Skandia Forsakrings AB 1,277,609 879,500 Skandinaviska Enskilda Banken Class A 8,828,105 131,246 Skanska AB Class B 4,521,078 148,000 SKF AB Class B 2,937,379 299,300 SSAB Swedish Steel Class A 3,635,845 73,600 SSAB Swedish Steel Class B 877,290 262,763 Stena Line AB Class B * 239,775 398,906 Svenska Cellulosa Class B 9,714,433 446,800 Svenska Handelsbanken Class A 5,223,794 124,400 Svenska Kullagerfabriken AB 2,327,090 696,682 Trelleborg AB Class B 4,887,184 91,350 Volvo AB Class A 2,021,433 365,650 Volvo AB Class B 8,612,607 ----------------- 101,443,473 ----------------- SWITZERLAND - 1.3% 670 Ascom Holding AG (Bearer) 2,658,475 4,980 Baloise Holdings 3,880,364 1,850 Banque Cantonale Vaudoise (Bearer) 521,158 14,120 BK Vision AG (Bearer) * 2,581,275 1,800 Fischer (Georg) AG (Registered) 537,281 400 Helvetia Patria Holding 275,713 870 Jelmoli (Bearer) 1,110,705 8,320 Merkur Holding AG (Registered) 2,393,671 See accompanying notes to the financial statements. 15 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- SWITZERLAND - CONTINUED 1,020 Pargesa Holdings SA (Bearer) 1,925,797 3,610 Pharma Vision * 2,737,143 17,330 SAir Group (Registered) 3,292,742 590 Saurer Group Holdings (Registered) * 294,576 680 Schweizerische Industrie-Gesellschaft Holding AG (Registered) 408,799 7,630 Schweizerische Lebensversicherungs-und Rentenanstalt 3,782,073 1,130 Sika Finanz AG (Bearer) 373,190 940 Sulzer Gebrueder AG (Registered) * 612,431 ----------------- 27,385,393 ----------------- UNITED KINGDOM - 13.1% 51,100 3i Group Plc 909,946 93,300 Allied Zurich Plc 793,146 484,380 AMEC 1,189,056 335,700 Anglian Water Plc 2,360,940 834,000 Arjo Wiggins Appleton Plc 2,080,219 927,357 Associated British Food 5,178,801 429,900 BAA 2,556,858 291,320 Barclays Plc 7,017,957 555,021 Barratt Development 1,507,036 688,084 Bass Plc 7,294,127 774,000 Beazer Holmes Plc 1,356,281 2,477,597 BG Group Plc 10,804,852 1,794,544 British Airways Plc 8,470,541 224,544 British Energy Plc 853,402 511,082 British Energy Plc (Deferred Shares) * - 379,628 Carillion Plc 530,380 174,100 Christian Salvesen Plc 368,290 1,905,093 Coats Viyella 1,225,546 71,200 Commercial Union Plc 849,181 2,677,875 Corus Group Plc 4,438,799 126,282 De Vere Group Plc 541,747 1,863,900 Eurotunnel SA Units (Registered) * 2,221,547 786,100 Halifax Group Plc 7,048,748 55,000 Hammerson Plc 279,579 744,830 HSBC Holdings Plc 8,671,716 270,485 Hyder Plc 859,340 335,499 Inchcape Plc 1,284,366 72,200 Johnson Matthey 822,925 8,646 Laing (John) 26,820 16 See accompanying notes to the financial statements. GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- UNITED KINGDOM - CONTINUED 97,600 Laird Group 298,138 446,020 Land Securities 4,861,876 424,611 Lonrho Africa Plc * 174,281 726,481 Lonrho Plc 7,798,643 2,787,300 Marks & Spencer 10,010,389 659,664 MEPC Plc 3,509,446 3,173,025 National Power 18,746,541 1,506,400 Northern Foods Plc 2,199,722 245,100 Norwich Union Plc 1,511,918 868,100 Peninsular & Oriental Steam Navigation Co 9,777,990 1,330,081 Powergen Plc 9,170,581 134,362 RMC Group 1,548,407 589,411 Royal & Sun Alliance Insurance Group 3,219,439 3,866,400 Sainsbury (J) 15,900,119 1,054,288 Scottish Hydro-Electric Plc 8,825,225 2,643,405 Scottish Power Plc 20,072,184 279,300 Scottish & Newcastle Plc 1,809,964 706,115 Severn Trent Plc 5,880,087 380,100 Shell Transport & Trading (Registered) 2,613,195 983,924 Signet Group Plc 788,285 293,000 Slough Estates 1,292,812 128,900 Southwest Water 861,772 405,500 Storehouse Plc 284,863 380,728 Tarmac Plc 3,498,031 203,500 Tate & Lyle 824,020 1,349,091 Taylor Woodrow Plc 2,885,801 5,329,500 Tesco 14,429,007 800,387 Thames Water Plc 8,781,540 337,156 Thistle Hotels Plc 774,426 125,100 Unigate 575,681 1,268,650 United Biscuits Plc 5,217,175 1,464,595 United Utilities 15,132,583 723,310 Viglen Technology Plc (Entitlement Letters) * - 284,574 Whitbread Plc Class A 2,356,278 107,400 Wilson (Connolly) Holdings 219,563 1,827,400 Wimpey (George) 2,942,522 1,201,643 Yorkshire Water 4,908,420 ----------------- 275,243,070 ----------------- TOTAL COMMON STOCKS (Cost $2,103,499,435) 1,998,322,934 ----------------- See accompanying notes to the financial statements. 17 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------------- INVESTMENT FUNDS - 1.4% HONG KONG - 1.4% 13,054,100 Tracker Fund of Hong Kong * 28,597,986 ----------------- TOTAL INVESTMENT FUNDS (Cost $21,852,856) 28,597,986 ----------------- PREFERRED STOCKS - 0.7% AUSTRIA - 0.0% 3,288 Allgemeine Baugesellschaft AG 171,730 3,036 Bau Holdings AG (Non Voting) 112,532 ----------------- 284,262 ----------------- GERMANY - 0.3% 36,650 Henkel KGAA 1,919,492 31,500 MAN AG 632,310 121,900 RWE AG 3,297,794 4,000 Villeroy & Boch AG (Non Voting) 35,429 35,100 Volkswagen AG 800,883 ----------------- 6,685,908 ----------------- ITALY - 0.4% 115,000 Compagnia Assicuratrice Unipol 204,825 295,170 Fiat SPA 5,001,479 88,200 IFI-Istituto Finanziario 2,233,253 ----------------- 7,439,557 ----------------- TOTAL PREFERRED STOCKS (Cost $16,104,618) 14,409,727 ----------------- RIGHTS & WARRANTS - 0.0% FRANCE - 0.0% 1,096,728 Eurotunnel SA Paris Warrants 10/31/01 * 31,676 1,096,728 Eurotunnel SA Paris Warrants 10/31/03 * 84,470 24,647 Generale des Eaux Warrants 5/02/01 * 136,678 45,829 Lafarge Co Rights 3/03/00 * 1,324 ----------------- 254,148 ----------------- HONG KONG - 0.0% 104,212 Chinese Estates Holdings Ltd Warrants 11/24/00 * 6,027 293,200 Gold Peak Industries Ltd Warrants 8/06/00 * 3,315 50 Mandarin Oriental International Ltd Rights 3/06/00 * - 486,692 Mandarin Oriental International Ltd Rights 3/06/00 * 4,870 40 Paul Y ITC Construction Holdings Ltd Warrants 12/22/00 * - ----------------- 14,212 ----------------- 18 See accompanying notes to the financial statements. GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares/ Par Value ($) Description Value ($) - ------------------------------------------------------------------------------------------------- ITALY - 0.0% 262,655 Banca Intesa SPA Warrants 11/15/02 * 702,982 ----------------- SINGAPORE - 0.0% 101,959 Asia Food & Properties Ltd Warrants 7/12/02 * 20,999 139,475 Haw Par Brothers International Ltd Warrants 7/18/01 * 89,008 ----------------- 110,007 ----------------- UNITED KINGDOM - 0.0% 4,622,000 Eurotunnel SA Warrants 10/31/03 * 300,981 ----------------- TOTAL RIGHTS & WARRANTS (Cost $1,110,161) 1,382,330 ----------------- SHORT-TERM INVESTMENTS - 7.5% CASH EQUIVALENTS - 6.7% $ 68,400,000 Royal Bank of Canada Time Deposit, 5.81% due 3/01/00 68,400,000 73,388,157 The Boston Global Investment Trust (b) 73,388,157 ----------------- 141,788,157 ----------------- U.S. GOVERNMENT - 0.8% $ 18,000,000 U.S. Treasury Bill, 4.91% due 1/04/01 (a) 17,089,995 ----------------- TOTAL SHORT-TERM INVESTMENTS (Cost $158,914,806) 158,878,152 ----------------- TOTAL INVESTMENTS - 104.2% (Cost $2,301,481,876) 2,201,591,129 Other Assets and Liabilities (net) - (4.2%) (88,606,039) ----------------- TOTAL NET ASSETS - 100.0% $ 2,112,985,090 ----------------- -----------------
See accompanying notes to the financial statements. 19 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 - -------------------------------------------------------------------------------- NOTES TO THE SCHEDULE OF INVESTMENTS ADR American Depositary Receipt SDR Swedish Depository Receipt (a) All or a portion of this security is held as collateral for open futures contracts (Note 5). (b) Represents investment of security lending collateral (Note 1). (c) Bankrupt issuer. * Non-income producing security. See accompanying notes to the financial statements. 20 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 - -------------------------------------------------------------------------------- At February 29, 2000, industry sector diversification of the Fund's equity investments was as follows: INDUSTRY SECTOR (UNAUDITED) Banking 16.8 % Utilities 7.9 Electronic Equipment 7.2 Conglomerates 5.7 Automotive 5.2 Energy Services 4.7 Chemicals 4.5 Consumer Goods 4.3 Transportation 4.0 Real Estate 3.9 Metals and Mining 3.7 Construction 3.6 Machinery 3.2 Services 3.0 Financial Services 2.9 Paper and Allied Products 2.8 Retail Trade 2.7 Telecommunications 2.4 Insurance 2.2 Communications 1.6 Food and Beverage 1.4 Health Care 1.4 Textiles 1.0 Aerospace 0.1 Computers 0.1 Miscellaneous 3.7 -------- 100.0 % -------- --------
21 See accompanying notes to the financial statements. GMO INTERNATIONAL CORE FUND (A Series of GMO Trust)
STATEMENT OF ASSETS AND LIABILITIES - FEBRUARY 29, 2000 - ---------------------------------------------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $2,301,481,876) (Note 1) $ 2,201,591,129 Foreign currency, at value (cost $5,423,828) (Note 1) 5,393,510 Cash 333,969 Receivable for Fund shares sold 29,705 Receivable for investments sold 1,606,735 Dividends and interest receivable 1,628,391 Foreign withholding taxes receivable 2,204,099 Receivable for expenses waived or borne by Manager (Note 2) 176,506 ------------------- Total assets 2,212,964,044 ------------------- LIABILITIES: Payable upon return of securities loaned (Note 1) 73,388,157 Payable for investments purchased 451,717 Net payable for open forward foreign currency contracts (Notes 1 and 5) 19,347,959 Payable for variation margin on open futures contracts (Notes 1 and 5) 1,795,346 Payable for Fund shares repurchased 3,369,910 Payable to affiliate for (Note 2): Management fee 935,820 Shareholder service fee 247,145 Accrued expenses 442,900 ------------------- Total liabilities 99,978,954 ------------------- NET ASSETS $ 2,112,985,090 ------------------- ------------------- NET ASSETS CONSIST OF: Paid-in capital $ 2,198,802,687 Accumulated undistributed net investment income 1,142,971 Accumulated undistributed net realized gain 26,227,058 Net unrealized depreciation (113,187,626) ------------------- $ 2,112,985,090 ------------------- ------------------- NET ASSETS ATTRIBUTABLE TO: Class II Shares $ 21,162,422 ------------------- ------------------- Class III Shares $ 1,799,928,594 ------------------- ------------------- Class IV Shares $ 291,894,074 ------------------- ------------------- SHARES OUTSTANDING: Class II 1,015,155 ------------------- ------------------- Class III 86,087,007 ------------------- ------------------- Class IV 13,968,183 ------------------- ------------------- NET ASSET VALUE PER SHARE: Class II $ 20.85 ------------------- ------------------- Class III $ 20.91 ------------------- ------------------- Class IV $ 20.90 ------------------- -------------------
22 See accompanying notes to the financial statements. GMO INTERNATIONAL CORE FUND (A Series of GMO Trust)
Statement of Operations - Year Ended February 29, 2000 - -------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of foreign tax expense of $6,353,075) $ 62,073,104 Interest (including securities lending income of $729,422) 8,079,222 ------------------- Total income 70,152,326 ------------------- EXPENSES: Management fee (Note 2) 13,366,668 Custodian fees 1,879,768 Audit fees 86,651 Transfer agent fees 60,472 Legal fees 56,709 Trustees fees (Note 2) 27,259 Registration fees 6,889 Miscellaneous 26,341 Fees waived or borne by Manager (Note 2) (2,144,089) ------------------- 13,366,668 Shareholder service fee (Note 2) Class II 54,439 Class III 3,046,864 Class IV 377,389 ------------------- Net expenses 16,845,360 ------------------- Net investment income 53,306,966 ------------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 107,186,791 Closed futures contracts 3,308,235 Foreign currency, forward contracts and foreign currency related transactions (43,502,803) ------------------- Net realized gain 66,992,223 ------------------- Change in net unrealized appreciation (depreciation) on: Investments 100,323,621 Open futures contracts 6,241,810 Foreign currency, forward contracts and foreign currency related transactions (6,607,253) ------------------- Net unrealized gain 99,958,178 ------------------- Net realized and unrealized gain 166,950,401 ------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 220,257,367 ------------------- -------------------
See accompanying notes to the financial statements. 23 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust)
Statement of Changes in Net Assets - ------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 -------------------- --------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 53,306,966 $ 61,654,740 Net realized gain 66,992,223 328,403,926 Change in net unrealized appreciation (depreciation) 99,958,178 (400,000,792) -------------------- --------------------- Net increase (decrease) in net assets resulting from operations 220,257,367 (9,942,126) -------------------- --------------------- Distributions to shareholders from: Net investment income Class II (710,851) (178,442) Class III (49,153,936) (24,881,986) Class IV (7,672,181) (7,130,973) -------------------- --------------------- Total distributions from net investment income (57,536,968) (32,191,401) -------------------- --------------------- In excess of net investment income Class II - (173,986) Class III - (24,260,672) Class IV - (6,952,911) -------------------- --------------------- Total distributions in excess of net investment income - (31,387,569) -------------------- --------------------- Net realized gains Class II (705,987) (1,663,218) Class III (57,973,177) (244,048,618) Class IV (9,597,437) (68,183,244) -------------------- --------------------- Total distributions from net realized gains (68,276,601) (313,895,080) -------------------- --------------------- Net share transactions: (Note 4) Class II 2,707,570 8,149,764 Class III (257,158,300) (758,532,071) Class IV (310,969,560) (20,202,197) -------------------- --------------------- Decrease in net assets from net fund share transactions (565,420,290) (770,584,504) -------------------- --------------------- Total decrease in net assets (470,976,492) (1,158,000,680) NET ASSETS: Beginning of period 2,583,961,582 3,741,962,262 -------------------- --------------------- End of period (including accumulated undistributed net investment income of $1,142,971 and of $4,494,422, respectively) $ 2,112,985,090 $ 2,583,961,582 -------------------- --------------------- -------------------- ---------------------
24 See accompanying notes to the financial statements. GMO INTERNATIONAL CORE FUND (A Series of GMO Trust)
FINANCIAL HIGHLIGHTS (For a Class II Share outstanding throughout each period) - --------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED FEBRUARY 28/29, -------------------------------------------------------------------- 2000 1999 1998 1997 * -------------- -------------- -------------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 20.33 $ 23.16 $ 24.36 $ 24.60 -------------- -------------- -------------- -------------- Income (loss) from investment operations: Net investment income 0.41 (c) 0.39 (c) 0.52 (c) 0.14 Net realized and unrealized gain (loss) 1.33 (0.46) 1.94 0.96 -------------- -------------- -------------- -------------- Total from investment operations 1.74 (0.07) 2.46 1.10 -------------- -------------- -------------- -------------- Less distributions to shareholders: From net investment income (0.56) (0.24) (0.74) (0.27) In excess of net investment income - (0.24) - - From net realized gains (0.66) (2.28) (2.92) (1.07) -------------- -------------- -------------- -------------- Total distributions (1.22) (2.76) (3.66) (1.34) -------------- -------------- -------------- -------------- NET ASSET VALUE, END OF PERIOD $ 20.85 $ 20.33 $ 23.16 $ 24.36 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- TOTAL RETURN (a) 8.09% (0.76%) 11.60% 4.51%*** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 21,162 $ 18,295 $ 12,500 $ 25,302 Net expenses to average daily net assets 0.76% 0.76% 0.76% 0.80%**(b) Net investment income to average daily net assets 1.84% 1.71% 2.14% 0.98%** Portfolio turnover rate 53% 60% 68% 97% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.02 $ 0.06 $ 0.07 $ 0.05
* Period from September 26, 1996 (commencement of operations) to February 28, 1997. ** Annualized *** Not annualized. (a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .04% of average daily net assets. (c) Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 25 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust)
Financial Highlights (For a Class III Share outstanding throughout each period) - -------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED FEBRUARY 28/29, ---------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ----------- ----------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 20.38 $ 23.20 $ 24.37 $ 24.62 $ 22.32 ----------- ----------- ----------- ---------- ---------- Income (loss) from investment operations: Net investment income 0.47 (c) 0.42 (c) 0.54 (c) 0.59 0.36 Net realized and unrealized gain (loss) 1.28 (0.47) 1.96 1.02 3.09 ----------- ----------- ----------- ---------- ---------- Total from investment operations 1.75 (0.05) 2.50 1.61 3.45 ----------- ----------- ----------- ---------- ---------- Less distributions to shareholders: From net investment income (0.56) (0.25) (0.75) (0.33) (0.39) In excess of net investment income - (0.24) - - - From net realized gains (0.66) (2.28) (2.92) (1.53) (0.76) ----------- ----------- ----------- ---------- ---------- Total distributions (1.22) (2.77) (3.67) (1.86) (1.15) ----------- ----------- ----------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 20.91 $ 20.38 $ 23.20 $ 24.37 $ 24.62 ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ---------- ---------- TOTAL RETURN (a) 8.20% (0.68%) 11.71% 6.72% 15.72% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 1,799,929 $ 1,998,447 $ 3,046,510 $ 4,232,937 $ 4,538,036 Net expenses to average daily net assets 0.69% 0.69% 0.69% 0.71% (b) 0.71% (b) Net investment income to average daily net assets 2.09% 1.84% 2.19% 2.34% 1.93% Portfolio turnover rate 53% 60% 68% 97% 14% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.02 $ 0.06 $ 0.07 $ 0.06 $ 0.03
(a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .02% of average daily net assets. (c) Computed using average shares outstanding throughout the period. 26 See accompanying notes to the financial statements. GMO INTERNATIONAL CORE FUND (A Series of GMO Trust)
Financial Highlights (For a Class IV Share outstanding throughout each period) - ---------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED FEBRUARY 28/29, ------------------------------------------------------------------ 2000 1999 1998 * ---------------- ---------------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 20.37 $ 23.19 $ 20.61 ---------------- ---------------- -------------- Income (loss) from investment operations: Net investment income 0.55 (b) 0.42 (b) 0.02 (b) Net realized and unrealized gain (loss) 1.21 (0.46) 2.56 ---------------- ---------------- -------------- Total from investment operations 1.76 (0.04) 2.58 ---------------- ---------------- -------------- Less distributions to shareholders: From net investment income (0.57) (0.25) - In excess of net investment income - (0.25) - From net realized gains (0.66) (2.28) - ---------------- ---------------- -------------- Total distributions (1.23) (2.78) - ---------------- ---------------- -------------- NET ASSET VALUE, END OF PERIOD $ 20.90 $ 20.37 $ 23.19 ---------------- ---------------- -------------- ---------------- ---------------- -------------- TOTAL RETURN (a) 8.18% (0.60%) 12.52% *** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 291,894 $ 567,219 $ 682,952 Net expenses to average daily net assets 0.63% 0.63% 0.63% ** Net investment income to average daily net assets 2.47% 1.85% 0.68% ** Portfolio turnover rate 53% 60% 68% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.02 $ 0.06 $ 0.01
* Period from January 9, 1998 (commencement of operations) to February 28, 1998. ** Annualized *** Not annualized. (a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 27 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements February 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO International Core Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities of non-U.S. issuers. The Fund's benchmark is the MSCI EAFE Index. The Fund offers three classes of shares: Class II, Class III and Class IV. The principal economic difference between the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully described in the Trust's prospectus. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from 28 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 5 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 29, 2000. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 29, 2000 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the 29 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. FUTURES CONTRACTS The Fund may purchase and sell stock index futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock market. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian and agency, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 5 for all open futures contracts as of February 29, 2000. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into swap agreements to manage its exposure to the equity markets. The Fund enters into total return swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 29, 2000, there were no open swap agreements. 30 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund loaned securities having a market value of $67,576,308 collateralized by cash in the amount of $73,388,157 which was invested in a short-term instrument. TAXES The 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"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U. S. federal income tax purposes. Therefore, no provision for U. S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund has incurred $2,398,652 related to repatriation taxes which is included in net realized gain in the Statement of Operations. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. The Fund declares separate dividends from net investment income on each class of shares. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to foreign currency and passive foreign investment company transactions, foreign taxes and differing treatments for redemptions in-kind. Gross gains resulting from such in-kind transactions amounted to $911,807. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U. S. federal tax rules versus accounting principles generally accepted in the United 31 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- States. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Accumulated Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital --------------------- -------------------------- --------------------- $878,551 $2,145,055 $ (3,023,606)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .60% of the amount invested. All purchase premiums are paid to and recorded by the Fund as paid-in capital. These fees are allocated relative to each class' net assets on the share transaction date. For the year ended February 29, 2000, the fund received $1,093,105 in purchase premiums. There is no premium for cash redemptions or reinvested distributions. While no purchase premium is normally charged with respect to in-kind purchases of Fund shares, a premium of up to .10% may be charged on certain in-kind purchases. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 32 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .22% for Class II shares, .15% for Class III shares, and .09% for Class IV shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .75% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceeded .54% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000, was $27,259. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $1,235,457,869 and $1,792,111,964, respectively. At February 29, 2000, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation ------------------ -------------------- -------------------- ------------------ $2,333,440,042 $258,395,733 $390,244,646 $131,848,913
33 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- 4. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 -------------------------------------------- ----------------------------------------- Class II: Shares Amount Shares Amount --------------------- ---------------------- -------------------- -------------------- Shares sold 363,778 $ 8,290,170 885,462 $ 19,191,959 Shares issued to shareholders in reinvestment of distributions 54,505 1,232,211 73,790 1,596,701 Shares repurchased (303,144) (6,814,811) (598,960) (12,638,896) --------------------- -------------------- -------------------- ------------------ Net increase 115,139 $ 2,707,570 360,292 $ 8,149,764 --------------------- -------------------- -------------------- ------------------ --------------------- -------------------- -------------------- ------------------ Year Ended Year Ended February 29, 2000 February 28, 1999 --------------------------------------------- -------------------------------------------- Class III: Shares Amount Shares Amount --------------------- ---------------------- ----------------------- -------------------- Shares sold 10,362,129 $ 236,178,961 11,023,810 $ 257,852,698 Shares issued to shareholders in reinvestment of distributions 4,170,163 94,366,903 12,569,888 274,662,387 Shares repurchased (26,508,769) (587,704,164) (56,861,371) (1,291,047,156) --------------------- --------------------- ------------------- --------------------- Net decrease (11,976,477) $ (257,158,300) (33,267,673) $ (758,532,071) --------------------- --------------------- ------------------- --------------------- --------------------- --------------------- ------------------- ---------------------
34 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- SHARE TRANSACTIONS - CONTINUED
Year Ended Year Ended February 29, 2000 February 28, 1999 -------------------------------------------- ----------------------------------------- Class IV: Shares Amount Shares Amount --------------------- ---------------------- -------------------- -------------------- Shares sold 5,114,795 $ 114,594,859 6,658,423 $ 166,390,526 Shares issued to shareholders in reinvestment of distributions 750,125 16,972,648 3,674,092 80,195,331 Shares repurchased (19,746,552) (442,537,067) (11,932,488) (266,788,054) --------------------- -------------------- -------------------- ------------------ Net decrease (13,881,632) $ (310,969,560) (1,599,973) $ (20,202,197) --------------------- -------------------- -------------------- ------------------ --------------------- -------------------- -------------------- ------------------
5. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ------------------ ------------------------- --------------------- ------------------- ------------------- Buys 04/07/00 AUD 60,228,907 $ 37,003,918 $ (1,996,082) 04/07/00 CAD 116,097,707 80,084,552 786,006 03/03/00 CHF 138,826,502 83,218,591 (5,999,424) 09/08/00 CHF 70,751,540 43,237,633 (1,033,166) 03/03/00 DKK 84,990,000 11,019,018 (980,982) 09/08/00 DKK 84,990,000 11,139,088 (314,319) 03/03/00 EUR 795,594,754 766,011,700 (58,805,831) 09/08/00 EUR 147,392,697 143,832,836 (3,928,127) 03/03/00 GBP 194,834,405 307,574,220 (5,915,561) 09/08/00 GBP 30,933,658 48,840,293 (790,794) 04/07/00 HKD 93,332,800 11,991,310 (8,690) 04/07/00 JPY 19,199,544,940 175,830,475 (8,891,939) 03/03/00 NOK 1,693,300,082 201,860,558 (9,188,403) 09/08/00 NOK 231,800,195 27,681,675 (818,490)
35 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS - CONTINUED
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ------------------ ------------------------- --------------------- ------------------- ------------------- Buys - continued 04/07/00 NZD 48,531,486 $ 23,573,878 $ (1,452,487) 03/03/00 SEK 991,329,574 113,081,256 (5,686,829) 09/08/00 SEK 380,799,517 43,873,861 (559,368) ------------------- $ (105,584,486) ------------------- ------------------- Sales 04/07/00 AUD 108,213,495 $ 66,485,073 $ 3,839,834 04/07/00 CAD 13,861,700 9,561,843 (61,843) 03/03/00 CHF 138,826,502 83,218,591 4,847,651 09/08/00 CHF 25,586,362 15,636,320 541,407 03/03/00 DKK 84,990,000 11,019,018 304,678 03/03/00 EUR 795,594,754 766,011,700 44,507,956 09/08/00 EUR 49,229,853 48,040,843 1,660,010 03/03/00 GBP 194,834,405 307,574,220 5,727,751 09/08/00 GBP 38,655,163 61,031,564 1,076,457 04/07/00 HKD 1,059,071,002 136,068,438 (175,704) 04/07/00 JPY 17,152,464,873 157,083,204 8,771,708 03/03/00 NOK 1,693,300,082 201,860,558 9,851,113 09/08/00 NOK 356,651,787 42,591,504 695,472 03/03/00 SEK 991,329,574 113,081,256 4,150,934 09/08/00 SEK 267,060,155 30,769,367 499,103 ------------------- $ 86,236,527 ------------------- -------------------
Currency Abbreviations: AUD Australian Dollar HKD Hong Kong Dollar CAD Canadian Dollar JPY Japanese Yen CHF Swiss Franc NOK Norwegian Kroner DKK Danish Krona NZD New Zealand Dollar EUR Euro SEK Swedish Krona GBP British Pound 36 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Appreciation Contracts Type Expiration Date Contract Value (Depreciation) ------------------ ------------------------- --------------------- ------------------- ------------------- Buys 214 DAX March 2000 $ 39,598,687 $ 1,646,658 705 TOPIX March 2000 110,959,447 5,093,055 ------------------- $ 6,739,713 ------------------- ------------------- Sales 368 ALL ORDS March 2000 $ 17,718,961 $ 54,643 629 FTSE 100 March 2000 62,060,642 1,198,053 257 IBEX 35 March 2000 31,086,704 (38,860) 33 MIB 30 March 2000 7,898,210 (1,621,826) ------------------- $ (407,990) ------------------- -------------------
At February 29, 2000, the Fund has cash and/or securities to cover any margin requirements on open futures contracts. 37 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) Federal Tax Information - (Unaudited) February 29, 2000 - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all the Fund's distributions are from investment company taxable income, except that the Fund has designated 8.76% as net capital gain dividends. 38 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham and Mr. Darnell have been portfolio managers at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. Mr. Berkley has been with GMO and involved in portfolio management for more than ten years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO International Core Fund returned 8.2% for the fiscal year ended February 29, 2000 as compared to 25.4% for the MSCI EAFE Index. The Fund's disappointing performance comes from stock selection that emphasized value stocks (those companies that are cheaper on price-to-book, price-to-earnings and other measures) and smaller capitalization stocks. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in common stocks throughout the period. In international markets, the fiscal year was characterized by explosive performance of the technology and telecommunications sectors. This effect was particularly strong in the fourth quarter of 1999, during which period the MSCI EAFE Growth Index returned 25.6% versus 8.9% for MSCI EAFE Value. While this paralleled the run-up in the U.S. NASDAQ Index, the EAFE Index contains relatively few pure Internet and information technology stocks. The international rally focused more on the best available approximation, which is telecommunications stocks. Both fixed line and wireless companies performed very strongly in the markets, as did the related equipment providers. The optimism about these companies came despite the failure of many other growth stocks, such as pharmaceuticals and established software companies, to produce continued strong earnings growth. In contrast, many neglected stocks - typically smaller capitalization, value companies - had lackluster market performance for the fiscal year. Throughout the bull market of the late 1990's, growth stocks have enjoyed increasing "multiple expansion" to higher relative levels of price-to-book and price-to-earnings. As a result the spread, or discount, between the valuations of the cheaper stocks on such measures and the most expensive stocks has reached levels unprecedented in history. These wide gaps are considerably beyond what could possibly be justified by the relatively modest differences in consensus growth rate estimates. This is true even if no regression of the higher profitability of telecommunications stocks took place in the next 20 years, which would be contrary to the entire history of corporate competition. The fiscal year was marked by strong performance in the Asian markets. Japan rose by 42% in local currency, while Hong Kong and Singapore returned +66% and +59%, respectively. These markets benefited both from the dissipation of the crisis mentality and from the underlying recovery in the economic fundamentals of the region. The only two countries that had higher returns than all the Asian markets were Finland and Sweden (dominated by the returns of Nokia and Ericsson respectively). The major European markets showed mixed returns, with Germany and France leading the way, both with gains of 56% (+37% in U.S. dollars). The United Kingdom and Switzerland were the worst performing major markets, with slightly negative returns in local currency and worse in dollar terms. EFFECT OF COUNTRY ALLOCATION The Fund was successful in country allocation largely due to the overweight of the South East Asian markets. The Fund was also neutral weighted in Japan. Although this decision did not add to relative return, it represented the first time in the Fund's history that it was not underweight in Japan. The Fund was generally underweight in Europe. It suffered from being overweight in Austria, but benefited from underweights in the United Kingdom and Switzerland. EFFECT OF CURRENCY ALLOCATION The dollar strengthened by 5% over the fiscal year relative to an EAFE basket of currencies. This was due to the decline of the Euro, which lost 12% against the dollar in the Euro's debut year. The Fund was modestly overweight in the Euro, causing a slight negative contribution, which was mostly erased by the Fund's accompanying underweight in the underperforming Swiss franc. The Fund had also suffered from being underweight in the yen, which strengthened by 8% against the dollar, making currency allocation a small net negative for the fund. EFFECT OF STOCK SELECTION The poor performance in the fiscal year was almost entirely a result of stock selection, and in particular of the Fund's tilt towards value. Because of the opportunities represented by the wide dispersion in price-to-book ratios, the Fund is heavily concentrated in the cheaper stocks on price-to-book. Half of the Fund is invested in stocks within the cheapest 25% of the EAFE universe; only 10% of the Fund is invested outside the cheapest 50% of the universe. Those groups underperformed EAFE by -14.5% and -9.3% respectively for the fiscal year. The Fund was further hurt by its emphasis on smaller capitalization stocks, which underperformed significantly even after accounting for their overlap with value. Small stocks within EAFE underperformed by -17%, and small value stocks underperformed by -30%. Value stocks did very poorly whether defined on the basis of book, earnings, sales or dividend yield, which shows that the Fund's underperformance is not a consequence of focussing on price-to-book as a valuation measure. The Fund's more sophisticated value models, which make further adjustments to credit companies for growth and financial quality, fared equally poorly. In this overheated environment, reasonable adjustments did not suffice to make the most expensive price-to-book stocks look attractive. Much of the size and value underperformance was driven by telecommunications and technology stocks. Of that, over 7% of negative attribution was due to just five large capitalization stocks that doubled or tripled in price from expensive starting levels. PORTFOLIO STRUCTURE AND OUTLOOK Based on a careful analysis of current company fundamentals and valuation, GMO has decided to retain its substantial overweights in value stocks and small companies, in order to benefit from the inevitable rebound. While the growth oriented bull market of the last few years has been a difficult period for the International Core Fund, it leaves us at a moment of great opportunity. For value investors it is always darkest before the dawn. Markets overshoot fair value, and it is difficult to call the turning points. Yet the greater the overshoot past fair value, the more certain is the eventual rebound, and greater is the reward to those that participate. Furthermore, globalization and the monetary union have not eliminated the significance of country selection. This is apparent in the wide spread of returns during the last fiscal year and also in a wide spread in valuations between countries, even when adjusted for industry composition. To take advantage of these opportunities, the Fund remains underweight in Europe and particularly in favor of Asia ex-Japan. Despite the strong performance of Asia in 1999, those markets still are attractively valued relative to the rest of EAFE. Even within Europe there are attractive opportunities to favor cheaper markets such as Austria over more expensive ones such as the United Kingdom and Spain. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. - -------------------------------------------------------------------------------- COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO INTERNATIONAL CORE FUND CLASS III SHARES AND THE MSCI EAFE INDEX AS OF FEBRUARY 29, 2000
- -------------------------------------------------------------------------------- Average Annual Total Return - -------------------------------------------------------------------------------- Since 1yr 5yr 10yr Inception - -------------------------------------------------------------------------------- 9/26/96 Class II 7.45% n/a n/a 6.57% - -------------------------------------------------------------------------------- Class III 7.55% 8.06% 8.31% n/a - -------------------------------------------------------------------------------- 1/9/98 Class IV 7.53% n/a n/a 9.01% - --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Date International Core Fund-III MSCI EAFE ---- --------------------------- --------- 2/28/90 9940 10000 3/31/90 10125 8958 6/30/90 10661 9814 9/30/90 8964 7733 12/31/90 9401 8548 3/31/91 10308 9183 6/30/91 9889 8682 9/30/91 10907 9426 12/31/91 10760 9584 3/31/92 10614 8447 6/30/92 11551 8626 9/30/92 10846 8756 12/31/92 10636 8418 3/31/93 12009 9427 6/30/93 12684 10375 9/30/93 13734 11063 12/31/93 14887 11158 3/31/94 15456 11549 6/30/94 15730 12139 9/30/94 15812 12150 12/31/94 15503 12026 3/31/95 15470 12250 6/30/95 16148 12340 9/30/95 16537 12854 12/31/95 17103 13374 3/31/96 17484 13760 6/30/96 17808 13978 9/30/96 17788 13961 12/31/96 18736 14183 3/31/97 18455 13961 6/30/97 19868 15773 9/30/97 20340 15662 12/31/97 18909 14434 3/31/98 22066 16558 6/30/98 21977 16733 9/30/98 18651 14353 12/31/98 21480 17318 3/31/99 21158 17558 6/30/99 22862 18004 9/30/99 23741 18796 12/31/99 24621 21988 2/29/00 22239 21145
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worthmore or less than their original cost. The total returns would have been lower had certain expenses nto been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 60 bp on the purchase. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of GMO Trust and the Shareholders of GMO International Small Companies Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO International Small Companies Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 18, 2000
GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Schedule of Investments (Showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - -------------------------------------------------------------------------------------------------- COMMON STOCKS - 89.6% AUSTRIA - 4.4% 747 Allgemeine Baugesellschaft AG 61,130 36,480 Austrian Airlines 572,474 1,721 Bau Holdings AG 70,087 41,896 Boehler Uddeholm (Bearer) 1,560,576 7,973 Brau Union AG 331,296 2,839 BWT AG 893,772 23,355 Flughafen Wien AG 840,940 3,089 Interunfall Versicherung AG 392,559 13,818 Mayr-Melnhof Karton AG (Bearer) 759,351 1,203 Oesterreichische Brau Beteiligungs AG 46,443 27,327 RHI AG 740,074 16,453 VA Technologie AG (Bearer) 972,584 8,694 Voest-Alpine Stahl AG 267,845 226 Wiener Allianz Versicherungs AG 28,503 4,580 Wolford AG 137,309 -------------- 7,674,943 -------------- BELGIUM - 1.0% 18,000 AGFA-Gevaert NV * 302,746 4,750 Colruyt SA 192,069 3,000 Compagnie Benelux Paribas SA 161,164 10,100 Delhaize-Le Lion 577,592 300 D'ieteren NV 86,648 475 Dolmen Computer Applications * 10,925 5,400 GIB Holdings Ltd 161,164 2,850 Tessenderlo Chemie 122,595 3,700 Union Miniere NPV 121,114 -------------- 1,736,017 -------------- CANADA - 1.4% 4,180 Cameco Corp 50,846 5,240 Canadian Tire Corp Ltd Class A 70,962 20,460 Cott Corp * 127,611 5,600 Donohue Inc Class A 128,132 58,000 Echo Bay Mines Ltd * 77,946 14,760 Ipsco Inc 203,446 14,570 Mackenzie Financial Corp 218,399 24,410 Methanex Corp * 52,656 10,710 Molson Co Ltd Class A 179,730 6,100 Moore Corp Ltd 27,746 28,200 Nexfor Inc 165,196 14,200 NS Power Holdings Inc 127,223
See accompanying notes to the financial statements. 1
GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - -------------------------------------------------------------------------------------------------- CANADA - CONTINUED 5,110 Quebecor Inc Class B 186,298 3,920 Sears Canada Inc 105,902 5,736 Sobeys Inc * 67,203 9,070 Torstar Corp Class B 112,516 18,140 Transalta Corp 173,774 200 TVA Group Inc Class B 4,652 42,070 TVX Gold Inc * 31,893 3,280 United Dominion Industries Ltd 61,599 15,250 Westcoast Energy Inc 220,710 -------------- 2,394,440 -------------- DENMARK - 0.0% 800 Hafnia Holdings (Registered) Class A (a) * 1 -------------- FRANCE - 8.2% 31,100 Accor SA 1,131,790 28,800 Alstom 665,176 3,010 Atos SA * 507,129 7,620 BIC SA 332,695 6,750 Club Mediterranee SA * 775,928 13,893 Compagnie Generale d'Industrie et de Participations 932,940 3,280 Compagnie Parisienne de Reescompte 170,522 2,132 Dexia Strip * 103 3,030 Eridania Beghin-Say SA 254,374 3,920 Essilor International 1,003,879 4,179 Gaz et Eaux 241,400 730 Groupe Andre * 139,859 2,530 Hermes International 319,084 4,330 Imetal 512,751 3,770 Legrand SA 642,433 11,190 Moulinex * 64,962 9,660 Pechiney SA Class A 563,590 15,655 Pernod Ricard 791,272 870 Publicis SA 443,086 8,000 SCOR SA 320,403 2,210 Seb SA 159,576 3,550 Simco Union Habit (Registered) 266,585 838 Societe Eurafrance 392,097 10,810 Sodexho Alliance 1,446,619 5,140 Technip SA 562,154 16,500 Thomson CSF 651,300 1,749 Unibail (Bearer) 220,753 46,270 Usinor Sacilor 674,879 -------------- 14,187,339 --------------
See accompanying notes to the financial statements. 2
GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - -------------------------------------------------------------------------------------------------- GERMANY - 7.6% 17,080 Adidas Salomon AG 907,696 77,450 AGIV AG 1,386,909 9,140 Altana AG 571,970 750 AMB Aachener & Muenchener Beteiligungs AG 51,989 1,310 Ava Allgemeine Handelsgesellschaft der Verbraucher AG 705,643 7,750 Axa Colonia Konzern AG 702,856 290 Axel Springer Verlag AG 382,501 29,120 Bankgesellschaft Berlin AG * 461,180 11,250 Bayerische Hypotheken und Wechsel-Bank AG 184,126 32,470 Berliner Kraft & Licht AG Class A 306,353 6,350 Bilfinger & Berger 91,702 26,810 Buderus AG 412,981 29,880 Continental AG 491,915 11,670 DBV-Winterthur Holding 408,965 7,140 Douglas Holdings AG 219,282 12,240 FAG Kugelfischer 102,521 16,610 Gehe AG 533,309 1,250 Hannover Rueckversicherungs 74,613 6,695 Heidelberg Port-Zement 377,068 7,330 Hochtief AG 176,424 780 Holzmann (Philipp) * 9,462 7,700 IKB Deutsche Industriebank AG 125,431 16,170 IWKA AG 269,321 5,050 Kamps AG 401,106 11,700 Karstadt Quelle AG 362,706 1,000 Kloeckner-Werke AG * 103,496 7,400 Linde AG 304,566 24,700 MAN AG 822,785 150 Marschollek Lautenschlaeger und Partner AG 58,559 30,790 Metallgesellschaft 579,522 3,500 Puma AG Rudolf Dassler Sport 59,305 770 Schmalbach-Lubeca 94,889 6,320 Schwarz Pharma AG 159,416 4,270 SGL Carbon AG * 411,505 43,186 SKW Trostberg 257,779 18,720 Suedzucker AG 189,238 7,910 Takkt AG * 63,969 7,720 Vereins Und Westbank 208,851 9,590 Wella AG 202,659 -------------- 13,234,568 --------------
See accompanying notes to the financial statements. 3
GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - -------------------------------------------------------------------------------------------------- HONG KONG - 5.1% 369,000 Amoy Properties Ltd 207,429 127,000 Asia Satellite Telecom 459,353 328,000 Chinese Estates Holdings Ltd * 55,209 66,000 Cross Harbour Tunnel Co Ltd 42,401 171,200 Dah Sing Financial Services 556,530 2,394,000 Denway Investment Ltd * 181,485 315,000 Elec & Eltek International Holdings Ltd 59,092 404,000 Giordano International Ltd 451,611 234,000 Goldlion Holdings Ltd 22,249 124,000 Great Eagle Holdings Ltd 165,699 3,230,000 Guangdong Investment Ltd * 435,769 336,000 Guoco Group 667,009 302,000 Hang Lung Development Co Ltd 234,761 349,000 Henderson Investment Ltd 237,665 446,400 HKR International Ltd 219,391 85,500 Hong Kong Aircraft Engineering Co Ltd 116,998 147,000 Hong Kong & Shanghai Hotels * 64,691 292,000 Hopewell Holdings Ltd 152,888 494,000 Hysan Development Co Ltd 514,134 14,800 Kowloon Motor Bus Holdings Ltd 30,997 298,000 Kumagai Gumi Ltd 71,219 3,378,000 Lippo China Resources Ltd * 125,870 98,000 Mandarin Oriental ADR 50,470 566,000 New World Infrastructure * 636,339 7,444,000 Pearl Oriental Cyberforce Ltd 353,893 100 Realty Development Corp Ltd Class A 127 726,000 Regal Hotels International Ltd * 53,171 372,000 Shun Tak Holdings Ltd 58,791 1,888,000 Sino Land 897,569 998,000 South China Morning Post Ltd 993,794 3,146,000 Top Glory International Holdings * 222,324 101 Tsim Sha Tsui Properties Ltd 64 51,000 Varitronix International 111,400 238,000 Wheelock and Co Ltd 159,017 16,000 Wing Lung Bank 57,357 52,000 Yue Yuen Industrial Holdings 99,887 -------------- 8,766,653 --------------
See accompanying notes to the financial statements. 4
GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - -------------------------------------------------------------------------------------------------- ITALY - 0.5% 102,000 Fornara SPA (a) * - 213,400 Grassetto SPA (a) * 1 3,500 Recordati Industria Chimica e Farmaceutica SPA 38,077 51,140 Recordati Industria Chimica e Farmaceutica SPA (Non Convertible) 271,285 69,713 Reno de Medici SPA 158,394 308,800 SNIA BPD SPA 356,459 -------------- 824,216 -------------- JAPAN - 19.5% 8,000 Aderans 218,470 89,000 Amada Co Ltd 600,328 23,000 Amano Corp 145,510 20,800 Aoyama Trading 293,667 8,000 Asatsu-DK Inc 469,710 14,000 Bandai Co 536,525 46,000 Canon Sales Co Inc 607,164 2,000 Chudenko Corp 23,686 184,000 Citizen Watch Co 1,355,023 202,000 Cosmo Oil Co Ltd 220,655 700 CSK Corp 72,896 43,000 Daicel Chemical Industries Ltd 142,870 90,000 Daido Steel Co Ltd 122,889 133,000 Daiei Inc 467,325 20,000 Dainippon Pharmaceutical Co Ltd 155,660 22,000 Daio Paper Corp 125,566 46,900 Daito Trust Construction Co Ltd 610,505 94,000 Denki Kagaku Kogyo 255,846 3,000 Denny's Japan Co Ltd 52,842 4,000 Don Quijote Co Ltd 582,586 7,000 Enix Corp 655,682 43,000 Ezaki Glico Co Ltd 198,844 8,000 Fuji Soft ABC Inc 565,109 23,000 Fujitec Co 201,411 61,000 Fukuyama Transporting Co Ltd 434,782 89,000 General Sekiyu (KK) 162,032 44,000 Hankyu Department Stores Inc 174,230 8,000 Hanwa Co Ltd * 7,064 165,000 Haseko Corp * 67,589 35,000 Hitachi Maxell Ltd 880,934 96,000 Hitachi Metals Ltd 517,336 27,000 Hokuetsu Paper Mills 157,298 17,000 House Foods Corp 247,599
See accompanying notes to the financial statements. 5
GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - -------------------------------------------------------------------------------------------------- JAPAN - CONTINUED 25,000 Hyogo Bank Ltd (a) * 2 66,000 INAX Corp 335,843 19,000 Itoham Foods Inc 74,371 28,000 Izumiya Co Ltd 166,438 22,000 Japan Airport Terminal Co Ltd 172,628 64,000 Japan Steel Works Ltd * 54,181 99,000 Japan Synthetic Rubber Co Ltd 766,010 46,000 JGC Corp * 110,964 25,000 Kamigumi Co Ltd 97,856 34,000 Kandenko Co 122,562 11,000 Katokichi Co Ltd 223,795 155,000 Keihin Electric Express Railway Co Ltd 540,394 194,000 Keio Teito Electric Railway Co Ltd 649,875 23,000 Kikkoman Corp 134,414 15,000 Kissei Pharmaceutical Co Ltd 252,606 5,000 Kokuyo Co Ltd 54,390 22,000 Komori Corp 280,370 48,000 Koyo Seiko Co Ltd 375,331 207,000 Kureha Chemical Industry Co Ltd 480,497 10,000 Kyowa Exeo Corp 63,265 6,000 Kyudenko Corp 17,041 77,000 Lion Corp 262,846 55,000 Maeda Corp 155,205 35,000 Maeda Road Construction 141,778 51,000 Makino Milling Machine Co Ltd 367,220 45,000 Makita Corp 370,716 93,000 Meiji Seika Kaisha Ltd 617,996 5,000 Misumi Corp 600,792 152,000 Mitsubishi Gas Chemical Co Inc 279,496 87,000 Mitsui Trust & Banking Co Ltd 134,632 27,000 Mori Seiki Co Ltd 352,692 12,000 Nagase & Co 40,963 36,000 Nagoya Railroad Co Ltd 97,984 34,000 Nankai Electric Railway Co Ltd 136,180 185,000 New Japan Securities Co Ltd * 850,439 10,000 NHK Spring Co Ltd 31,496 23,000 Nichicon Corp 682,536 12,000 Nichiei Co Ltd (Kyoto) * 242,501 33,000 Nippon Hodo Co 136,981 67,000 Nippon Meat Packers Inc 615,994 900 Nippon Oil Co Ltd 3,162
See accompanying notes to the financial statements. 6
GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - -------------------------------------------------------------------------------------------------- JAPAN - CONTINUED 23,000 Nippon Paint Co 55,482 22,000 Nippon Shokubai Corp 83,110 68,000 Nippon Suisan Kaisha Ltd 102,135 38,000 Nissan Fire & Marine Insurance Co Ltd 97,547 38,000 Nisshin Oil Mills Ltd 102,044 259,000 Nisshin Steel Co Ltd 240,481 41,000 Nisshinbo Industries Inc 154,140 10,000 Nissin Food Products 213,918 55,000 Nitto Boseki Co Ltd 65,586 35,000 Okamoto Industries Inc 74,871 255,600 Onoda Cement Co Ltd 386,233 51,000 Onward Kashiyama Co Ltd 492,567 2,000 Oyo Corp 22,138 26,000 Q.P. Corp 196,441 273,000 Renown Inc 402,585 5,000 Rinnai Corp 83,292 45,000 Royal Co Ltd 364,571 5,000 Ryosan Co 81,881 20,000 Sanden Corp 102,317 69,000 Sankyo Aluminum Industry Co Ltd * 57,785 12,000 Sanrio Co Ltd 480,634 26,000 Santen Pharmaceutical 446,844 145,000 Sanyo Securities Co Ltd * 1,320 700 Sega Enterprises 22,939 47,000 Seino Transportation Co Ltd 235,738 6,000 Shimachu Co 60,079 325,000 Showa Denko * 414,182 124,000 Showa Shell Sekiyu 419,899 5,000 Skylark Co Ltd 118,565 61,000 Stanley Electric Co Ltd 470,875 43,000 Sumitomo Bakelite Co Ltd 489,281 27,895 Takara Standard Co 101,824 65,000 Tanabe Seiyaku Co Ltd 395,248 69,000 Teikoku Oil Co Ltd 196,596 95,000 Toda Corp 288,835 52,000 Tokai Carbon Co Ltd 84,257 42,000 Tokuyama Corp 152,164 76,000 Tokyo Electric Co Ltd 370,124 88,000 Tokyo Ink Manufacturing Co Ltd 161,813 30,000 Tokyo Style Co Ltd 245,779 10,000 Toyo Suisan Kaisha 61,900
See accompanying notes to the financial statements. 7
GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - -------------------------------------------------------------------------------------------------- JAPAN - CONTINUED 36,000 Tsubakimoto Chain 141,896 162,000 Victor Co of Japan Ltd 946,739 49,000 Wacoal Corp 352,374 82,000 Yakult Honsha Co Ltd 687,470 10,000 Yamatake Honeywell 81,835 62,000 Yodogawa Steel Works 160,848 18,000 Yokogawa Electric Corp 163,361 89,000 Yokohama Rubber Co 275,454 -------------- 33,832,072 -------------- LUXEMBOURG - 0.0% 1,170 Carrier1 International SA ADR * 37,952 -------------- MALAYSIA - 0.0% 357,000 Promet Berhad * 27,245 312,000 Rekapacific Berhad * 37,768 -------------- 65,013 -------------- NORWAY - 0.0% 1 SAS Norge ASA Class B 9 -------------- SINGAPORE - 5.4% 1,396,000 Asia Food & Properties Ltd * 473,783 152,000 Aztech Systems Ltd 53,350 26,000 Cerebos Pacific Ltd 46,157 238,000 Comfort Group 106,318 52,000 Creative Technology Ltd 1,131,285 135,000 Cycle & Carriage Ltd 297,616 192,600 Dairy Farm International Holdings Ltd 108,819 91,000 Elec & Eltek International Company Ltd 239,330 216,000 First Capital Corp Ltd 161,652 244,000 Fraser & Neave 679,469 385,000 Goldtron * 88,226 20,000 GP Batteries International Ltd 18,449 23,000 Haw Par Brothers International Ltd 39,230 596,000 Hotel Properties Ltd 525,567 106,500 Keppel FELS Energy & Infrastructure * 68,582 871,000 Keppel Land Ltd 995,457 85,000 Marco Polo Developments Ltd 90,735 285,000 Natsteel Ltd 565,470 592,000 Neptune Orient Lines Ltd * 484,261 16,000 Overseas Union Enterprise 41,028 248,000 Parkway Holdings Ltd 684,852
See accompanying notes to the financial statements. 8
GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - -------------------------------------------------------------------------------------------------- SINGAPORE - CONTINUED 587,000 Sembcorp Industries Ltd 548,280 135,000 Sembcorp Marine Ltd 106,515 154,000 Shangri-La Asia Ltd 125,649 121,000 Singapore Land Ltd 223,229 26,000 Straits Trading Co Ltd 27,151 16,000 Times Publishing Ltd 32,674 513,000 United Industrial Corp Ltd 223,212 108,000 United Overseas Land 75,814 251,000 Van Der Horst Ltd * 64,800 320,000 Want Want Holdings 336,000 944,000 Wing Tai Holdings 706,480 -------------- 9,369,440 -------------- SWEDEN - 3.0% 19,270 Gambro AB Class A 134,079 11,160 Gambro AB Class B 78,923 34,034 Industrivarden AB Class A 937,517 16,210 Kinnevik Investment Class B 645,294 25,670 Mo Och Domsjo AB Class B 726,150 2,100 Modern Times Group AB * 109,228 6,570 SSAB Swedish Steel Class A 79,811 233,084 Stena Line AB Class B * 212,692 9,937 Svedala Industries 145,082 33,800 Svenska Cellulosa Class B 823,121 13,535 Svenska Kullagerfabriken AB 253,193 40,488 Sydkraft AB Class C 738,916 8,398 Tryggtia Compulsory 233,730 -------------- 5,117,736 -------------- SWITZERLAND - 5.9% 1,020 Baloise Holdings 794,773 610 Banque Cantonale Vaudoise (Bearer) 171,841 3,190 BK Vision AG (Bearer) * 583,164 40 Bobst AG (Bearer) 51,546 60 Bobst AG (Registered) 37,797 8,430 CIBA Specialty Chemicals Holdings (Registered) 538,117 50 Ems-Chemie Holding AG (Bearer) * 215,776 190 Forbo Holdings AG (Registered) 78,123 240 Helvetia Patria Holding 165,428 280 Hilti AG (Participating Certificate) 221,530 180 Intershop Holdings AG (Bearer) 101,954 120 Jelmoli (Bearer) 153,201 190 Jelmoli (Registered) 48,855
See accompanying notes to the financial statements. 9
GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - -------------------------------------------------------------------------------------------------- SWITZERLAND - CONTINUED 490 Julius Baer Holdings (Bearer) 1,503,716 65 Kuoni Reisen Holdings AG (Registered) 296,092 1,490 Lonza AG * 758,217 50 Motor-Columbus (Bearer) 81,665 140 Movenpick Holdings (Bearer) 65,452 1,940 Oerlikon-Buhrle (Registered) * 481,395 110 Pargesa Holdings SA (Bearer) 207,684 900 Pharma Vision * 682,390 330 Rieter Holdings AG (Registered) 203,530 5,340 SAir Group (Registered) 1,014,613 230 Saurer Group Holdings (Registered) * 114,835 70 Schindler-Holding AG (Participating Certificates) 101,283 100 Schindler-Holding AG (Registered) 143,850 170 Schweizerische Industrie-Gesellschaft Holding AG (Registered) 102,200 380 Sika Finanz AG (Bearer) 125,497 150 Societe Generale de Surveillance Holding SA (Registered) * 60,237 1,000 Sulzer Gebrueder AG (Registered) * 651,522 220 Verwalt & Privat-Bank AG 213,486 100 Vontobel Holding AG Class B 179,813 60 Zellweger Luwa AG (Bearer) 35,675 -------------- 10,185,257 -------------- UNITED KINGDOM - 27.6% 61,100 Airtours Plc 273,210 234,000 Allied Domecq Plc 965,992 140,600 AMEC 345,145 41,200 Anglian Water Plc 289,755 113,680 Arjo Wiggins Appleton Plc 283,548 163,660 Associated British Ports 538,684 111,540 Barratt Development 302,862 124,200 Beazer Holmes Plc 217,636 87,052 Berisford International 380,666 217,900 BICC Group 202,953 69,390 Blue Circle Industries 467,473 68,710 Bowthorpe Holdings 1,358,575 131,240 BPB Industries Plc 561,981 14,000 Britannic Plc 162,443 244,100 British Energy Plc 927,726 129,790 British Land Co 712,003 198,925 Bunzl Co 902,845 204,000 Caradon Plc 426,709 140,660 Carillion Plc 196,517
See accompanying notes to the financial statements. 10
GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - -------------------------------------------------------------------------------------------------- UNITED KINGDOM - CONTINUED 25,900 Cattle's Plc 91,383 57,300 Celltech Group Plc * 1,208,501 23,870 Charter Plc (Registered) 74,423 43,710 Christian Salvesen Plc 92,464 47,908 Cobham Group Plc 544,536 131,900 Coca-Cola Beverages Plc * 250,910 41,621 De Vere Group Plc 178,553 132,331 Debenhams Plc 312,312 65,330 Delta Plc 110,868 180,450 Electrocomponents Plc 2,049,621 213,574 Elementis Plc 242,754 44,900 Enterprise Oil 225,048 51,962 Express Dairies Plc 66,444 52,100 Gallaher Group Plc 206,647 46,170 Glynwed International 157,617 79,810 Great Portland Estates Plc 226,156 127,896 Hammerson Plc 650,128 102,310 Hazlewood Foods 121,941 91,670 Hepworth Plc 217,072 60,063 Hyder Plc 190,822 32,100 Imperial Tobacco Group Plc 212,327 29,069 Inchcape Plc 111,283 109,820 Johnson Matthey 1,251,712 764,487 Ladbroke Group 2,796,892 46,130 Laird Group 140,913 680,817 Lasmo Plc 1,018,346 73,980 Lex Service 388,322 186,776 Lonrho Africa Plc * 76,662 173,646 Lonrho Plc 1,864,059 50,998 Meyer International 406,565 260,260 MFI Furniture Group 235,217 120,430 Morgan Crucible 475,292 259,097 New Securicor Plc 691,250 68,400 Next Plc 566,893 286,460 NFC Plc 1,505,893 156,725 Northern Foods Plc 228,858 63,500 Northern Rock Plc 268,905 104,000 Nycomed Amersham Plc 826,234 56,262 Ocean Group Plc 1,079,139 247,720 Pilkington 260,057 112,130 Premier Farnell Plc 778,862
See accompanying notes to the financial statements. 11
GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - -------------------------------------------------------------------------------------------------- UNITED KINGDOM - CONTINUED 123,055 Provident Financial Plc 1,000,443 142,920 Racal Electronics 940,838 94,900 Rank Group Plc 236,706 32,000 Reckitt Benckiser Plc 278,095 148,911 Rexam Plc 430,781 143,100 Rolls-Royce 465,929 19,130 Saatchi & Saatchi Plc 124,271 121,400 Safeway Plc 296,575 157,000 Scottish & Newcastle Plc 1,017,416 48,300 Severn Trent Plc 402,212 58,960 Slough Estates 260,151 139,200 Smith & Nephew Plc 416,972 131,810 Smith (WH) Group Plc 658,579 80,800 Somerfield Plc 69,836 69,436 Southwest Water 464,220 218,050 St James's Place Capital 647,142 206,742 Storehouse Plc 145,236 140,660 Tarmac Plc 1,292,348 93,070 Tate & Lyle 376,863 653,480 Taylor Woodrow Plc 1,397,840 83,216 Thames Water Plc 913,014 56,199 Transport Development Group Plc 211,594 78,790 Unigate 362,573 24,100 United Assurance Group Plc 172,726 231,310 United Biscuits Plc 951,235 61,500 United News & Media Plc 816,987 96,926 Viglen Technology Plc (Entitlement Letters) * - 110,760 Wilson (Connolly) Holdings 226,432 402,435 Wimpey (George) 648,010 166,480 Yorkshire Water 680,030 -------------- 47,823,658 -------------- UNITED STATES - 0.0% 2,125 Ultramar Diamond Shamrock Corp 46,086 -------------- TOTAL COMMON STOCKS (Cost $184,150,101) 155,295,400 --------------
See accompanying notes to the financial statements. 12
GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - -------------------------------------------------------------------------------------------------- PREFERRED STOCKS - 2.2% GERMANY - 2.1% 6,140 Fresenius Medical Care AG (Non Voting) 1,111,322 8,650 MAN AG 173,634 490 Porsche AG (Non Voting) 1,419,960 5,250 Prosieben Media AG 748,057 5,650 Wella AG 136,532 -------------- 3,589,505 -------------- ITALY - 0.1% 45,350 La Rinascente SPA 158,052 -------------- TOTAL PREFERRED STOCKS (Cost $3,231,923) 3,747,557 -------------- RIGHTS & WARRANTS - 0.0% GERMANY - 0.0% 5,050 Kamps AG Rights 3/08/00 * 243 -------------- HONG KONG - 0.0% 19,600 Mandarin Oriental International Ltd Rights 3/06/00 * 196 2 Mandarin Oriental International Ltd Rights 3/06/00 * - -------------- 196 -------------- SINGAPORE - 0.0% 1,650 Haw Par Brothers International Ltd Warrants 7/18/01 * 1,053 -------------- TOTAL RIGHTS & WARRANTS (Cost $7,409) 1,492 --------------
See accompanying notes to the financial statements. 13
GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000 Shares/ Par Value ($) Description Value ($) - -------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS - 12.7% CASH EQUIVALENTS - 11.1% $ 16,200,000 Royal Bank of Canada Time Deposit, 5.81% due 3/01/00 16,200,000 3,053,195 The Boston Global Investment Trust (b) 3,053,195 -------------- 19,253,195 -------------- U.S. GOVERNMENT - 1.6% $ 3,000,000 U.S. Treasury Bill, 4.91% due 1/04/01 (c) 2,848,333 -------------- TOTAL SHORT-TERM INVESTMENTS (Cost $22,107,636) 22,101,528 -------------- TOTAL INVESTMENTS - 104.5% (Cost $209,497,069) 181,145,977 Other Assets and Liabilities (net) - (4.5%) (7,784,215) -------------- TOTAL NET ASSETS - 100.0% $ 173,361,762 -------------- --------------
NOTES TO THE SCHEDULE OF INVESTMENTS: ADR American Depositary Receipt (a) Bankrupt issuer. (b) Represents investment of security lending collateral (Note 1). (c) All or a portion of this security is held as collateral for open futures contracts (Note 6). * Non-income producing security. See accompanying notes to the financial statements. 14 GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 - -------------------------------------------------------------------------------- At February 29, 2000, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR (UNAUDITED) Services 10.1% Consumer Goods 9.6 Machinery 7.6 Construction 7.4 Conglomerates 7.2 Electronic Equipment 6.6 Financial Services 4.8 Health Care 4.8 Retail Trade 4.3 Real Estate 4.2 Transportation 3.9 Chemicals 3.6 Metals and Mining 3.2 Food and Beverage 2.4 Communications 2.4 Paper and Allied Products 2.1 Insurance 2.1 Banking 1.8 Utilities 1.7 Energy Services 1.4 Aerospace 1.4 Textiles 1.3 Automotive 1.2 Computers 1.1 Telecommunications 0.4 Miscellaneous 3.4 -------------- 100.0 % -------------- --------------
See accompanying notes to the financial statements. 15
GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) Statement of Assets and Liabilities - FEBRUARY 29, 2000 - ------------------------------------------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $209,497,069) (Note 1) $ 181,145,977 Foreign currency, at value (cost $359,667) (Note 1) 359,996 Cash 23,831 Dividends and interest receivable 175,812 Receivable for investments sold 480,638 Foreign withholding taxes receivable 99,120 Receivable for expenses waived or borne by Manager (Note 2) 19,991 ------------------- Total assets 182,305,365 ------------------- LIABILITIES: Net payable for open forward foreign currency contracts (Notes 1 and 6) 1,613,455 Payable for investments purchased 20,456 Payable upon return of securities loaned (Note 1) 3,053,195 Payable for Fund shares repurchased 3,626,000 Payable for variation margin on open futures contracts (Notes 1 and 6) 321,904 Payable to affiliate for (Note 2): Management fee 87,822 Shareholder service fee 21,957 Accrued expenses and other liabilities 198,814 ------------------- Total liabilities 8,943,603 ------------------- NET ASSETS $ 173,361,762 ------------------- ------------------- NET ASSETS CONSIST OF: Paid-in capital $ 189,372,714 Accumulated undistributed net investment income 3,214,543 Accumulated undistributed net realized gain 9,709,723 Net unrealized depreciation (28,935,218) ------------------- $ 173,361,762 ------------------- ------------------- NET ASSETS ATTRIBUTABLE TO CLASS III SHARES $ 173,361,762 ------------------- ------------------- SHARES OUTSTANDING - CLASS III 15,022,947 ------------------- ------------------- NET ASSET VALUE PER SHARE - CLASS III $ 11.54 ------------------- -------------------
See accompanying notes to the financial statements. 16 GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Statement of Operations - Year Ended February 29, 2000 - -------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of foreign tax expense of $473,276) $ 4,167,817 Interest (including securities lending income of $23,541) 732,474 ------------------ Total income 4,900,291 ------------------ EXPENSES: Management fee (Note 2) 1,000,168 Custodian fees 298,389 Audit fees 54,368 Transfer agent fees 31,697 Legal fees 3,672 Registration fees 2,078 Trustees fees (Note 2) 1,784 Miscellaneous 3,830 Fees waived or borne by Manager (Note 2) (395,818) ------------------ 1,000,168 Shareholder service fee - Class III (Note 2) 250,044 ------------------ Net expenses 1,250,212 ------------------ Net investment income 3,650,079 ------------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 18,029,895 Closed futures contracts 741,287 Foreign currency, forward contracts and foreign currency related transactions (3,119,065) ------------------ Net realized gain 15,652,117 ------------------ Change in net unrealized appreciation (depreciation) on: Investments (7,429,244) Open futures contracts 1,319,913 Foreign currency, forward contracts and foreign currency related transactions (627,689) ------------------ Net unrealized loss (6,737,020) ------------------ Net realized and unrealized gain 8,915,097 ------------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 12,565,176 ------------------ ------------------
See accompanying notes to the financial statements. 17 GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Statement of Changes in Net Assets - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ------------------------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 3,650,079 $ 3,486,990 Net realized gain 15,652,117 8,155,069 Change in net unrealized appreciation1(depreciation)ommencement (6,737,020) (20,794,784) -------------------- -------------------- Net increase (decrease) in net assets resulting from operations 12,565,176 (9,152,725) -------------------- -------------------- Distributions to shareholders from: Net investment income - Class III (1,936,570) (3,362,663) Net realized gains - Class III (5,554,088) (6,450,138) -------------------- -------------------- (7,490,658) (9,812,801) -------------------- -------------------- Net share transactions - Class III (Note 5) 10,145,710 (57,047,497) -------------------- -------------------- Total increase (decrease) in net assets 15,220,228 (76,013,023) NET ASSETS: Beginning of period 158,141,534 234,154,557 -------------------- -------------------- End of period (including accumulated undistributed net investment income of $3,214,543 and $4,386,622, respectively) $ 173,361,762 $ 158,141,534 -------------------- -------------------- -------------------- --------------------
See accompanying notes to the financial statements. 18 GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Financial Highlights (For a Class III Share outstanding throughout each period) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------------------------- 2,000 1999 1998 1997 1996 ---------- ---------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.02 $ 12.22 $ 13.46 $ 12.95 $ 11.95 ---------- ---------- ----------- ----------- ----------- Income (loss) from investment operations: Net investment income 0.25 0.55 0.27 0.23 0.18 Net realized and unrealized gain (loss) 0.83 (1.15) 0.42 0.55 1.16 ---------- ---------- ----------- ----------- ----------- Total from investment operations 1.08 (0.60) 0.69 0.78 1.34 ---------- ---------- ----------- ----------- ----------- Less distributions to shareholders from: Net investment income (0.15) (0.21) (0.26) (0.07) (0.17) In excess of net investment income - - - - (0.02) Net realized gains (0.41) (0.39) (1.67) (0.20) (0.15) In excess of net realized gains - - - 0.00 - ---------- ---------- ----------- ----------- ----------- Total distributions (0.56) (0.60) (1.93) (0.27) (0.34) ---------- ---------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 11.54 $ 11.02 $ 12.22 $ 13.46 $ 12.95 ---------- ---------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- TOTAL RETURN (A) 9.62% (5.06%) 6.92% 5.99% 11.43% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 173,362 $ 158,142 $ 234,155 $ 235,653 $ 218,964 Net expenses to average daily net assets 0.75% 0.75% 0.75% 0.76%(b) 0.76%(b) Net investment income to average daily net assets 2.19% 1.67% 1.93% 1.75% 1.84% Portfolio turnover rate 55% 8% 79% 13% 13% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.03 $ 0.27 $ 0.12 $ 0.10 $ 0.07
(a) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Includes stamp duties and taxes not waived or borne by the Manager, which approximate .01% of average daily net assets. See accompanying notes to the financial statements. 19 GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Notes to Financial Statements February 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO International Small Companies Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities of non-U.S. issuers. The Fund's benchmark is the Salomon Smith Barney EMI World ex-U.S. Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. 20 GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to sell is shown under Note 6, and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 29, 2000. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 29, 2000 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. 21 GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- FUTURES CONTRACTS The Fund may purchase and sell stock index futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock market. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund enters into swap agreements to manage its exposure to the equity markets. The Fund enters into total return swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 29, 2000, there were no open swap agreements. 22 GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund loaned securities having a market value of $2,897,067 collateralized by cash in the amount of $3,053,195, which was invested in a short-term instrument. TAXES The 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"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund has incurred $131,475 related to repatriation taxes which is included in net realized gain in the Statement of Operations. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to foreign currency and passive foreign investment company transactions, and foreign taxes. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United 23 GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- States. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Accumulated Undistributed Net Accumulated Net Realized Investment Income Gain/(loss) Paid-in Capital -------------------- -------------------------- ------------------ $(2,885,588) $2,885,588 -
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the Funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is 1.00% of the amount invested. In the case of cash redemptions, the fee is .60% of the amount redeemed. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $510,773 in purchase premiums and $286,789 in redemption fees. There is no premium for reinvested distributions. While no purchase premium is normally charged with respect to in-kind purchases of Fund shares, a premium of up to .10% may be charged on certain in-kind purchases. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 24 GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .60% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of 1.25% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceeded .60% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000, was $1,784. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $83,864,263 and $85,664,442, respectively. At February 29, 2000, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation ---------------------- ------------------ ------------------- ------------------- $210,794,269 $15,803,275 $45,451,567 $29,648,292
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 50.2% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders could have a material effect. 25 GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended Class III: February 29, 2000 February 28, 1999 -------------------------------------------- ------------------------------------------- Shares Amount Shares Amount --------------------- -------------------- ------------------- -------------------- Shares sold 4,151,532 $ 51,077,290 816,456 $ 9,903,936 Shares issued to shareholders in reinvestment of distributions 557,607 6,666,063 718,062 8,300,432 Shares repurchased (4,031,520) (47,597,643) (6,353,000) (75,251,865) --------------------- -------------------- -------------------- -------------------- Net increase/ (decrease) 677,619 $ 10,145,710 (4,818,482) $ (57,047,497) --------------------- -------------------- -------------------- -------------------- --------------------- -------------------- -------------------- --------------------
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ------------------ ------------------------- --------------------- ------------------- ------------------- Buys 04/07/00 AUD 10,218,795 $ 6,278,305 $ (431,738) 04/07/00 CAD 24,946,400 17,208,103 132,347 03/03/00 CHF 31,304,714 18,765,396 (1,045,917) 09/08/00 CHF 8,709,668 5,322,646 (182,515)
26 GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - --------------------------------------------------------------------------------
FORWARD CURRENCY CONTRACTS - CONTINUED Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ------------------ ------------------------- --------------------- ------------------- ------------------- Buys - continued 03/03/00 DKK 16,809,000 $ 2,179,300 $ (125,966) 09/08/00 DKK 8,502,600 1,114,381 (31,445) 03/03/00 EUR 67,575,416 65,062,720 (4,429,369) 09/08/00 EUR 33,387,616 32,581,231 (796,985) 03/03/00 GBP 33,624,792 53,081,586 (980,741) 09/08/00 GBP 11,440,150 18,062,534 (227,101) 04/07/00 HKD 20,791,768 2,671,307 1,954 04/07/00 JPY 1,917,509,184 17,560,653 (956,550) 03/03/00 NOK 147,609,722 17,596,756 (928,021) 09/08/00 NOK 78,836,068 9,414,631 (179,366) 04/07/00 NZD 3,426,980 1,664,635 (97,446) 03/03/00 SEK 98,190,304 11,200,597 (544,463) 09/08/00 SEK 56,760,788 6,539,701 (97,796) ------------------- $ (10,921,118) ------------------- ------------------- Sales 04/07/00 AUD 1,716,967 $ 1,054,884 $ 59,264 04/07/00 CAD 5,632,050 3,885,005 (41,510) 03/03/00 CHF 31,304,714 18,765,396 1,353,405 09/08/00 CHF 16,707,752 10,210,430 303,229 03/03/00 DKK 16,809,000 2,179,300 153,550 09/08/00 DKK 8,306,400 1,088,666 28,687 03/03/00 EUR 67,575,415 65,062,720 3,079,687 09/08/00 EUR 18,306,602 17,864,457 615,111 03/03/00 GBP 33,624,792 53,081,586 891,177 09/08/00 GBP 19,465,632 30,733,745 568,477 04/07/00 HKD 69,115,956 8,879,953 (8,391) 04/07/00 JPY 2,735,550,085 25,052,316 1,114,214 03/03/00 NOK 147,609,762 17,596,756 712,921 09/08/00 NOK 42,005,414 5,016,304 102,965 03/03/00 SEK 98,190,304 11,200,597 329,613 09/08/00 SEK 15,913,353 1,833,459 45,264 ------------------- $ 9,307,663 ------------------- -------------------
27 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- Currency Abbreviations: AUD Australian Dollar HKD Hong Kong Dollar CAD Canadian Dollar JPY Japanese Yen CHF Swiss Franc NOK Norwegian Kroner DKK Danish Krona NZD New Zealand Dollar EUR Euro SEK Swedish Krona GBP British Pound FUTURES CONTRACTS
Net Unrealized Number of Appreciation Contracts Type Expiration Date Contract Value (Depreciation) ------------------ ------------------------- --------------------- ------------------- ------------------- Buys 27 ALL ORDS March 2000 $ 1,300,032 $ 19,401 37 CAC 40 March 2000 2,212,467 195,807 82 DAX March 2000 15,173,329 355,867 3 HANG SENG March 2000 327,646 13,460 172 OMX March 2000 2,824,159 136,003 20 S&P/TSE 60 March 2000 1,443,143 67,430 51 TOPIX March 2000 8,026,854 410,735 ------------------- $ 1,198,703 ------------------- ------------------- Sells 209 FTSE 100 March 2000 $ 20,621,104 $ (120,481) 2 MIB 30 March 2000 478,679 (19,781) ------------------- $ (140,262) ------------------- -------------------
At February 29, 2000, the Fund has cash and/or securities to cover any margin requirements on open futures contracts. 28 GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) Federal Tax Information - (Unaudited) February 29, 2000 - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all the Fund's distributions are from investment company taxable income, except that the Fund has designated 74.15% as net capital gain dividends. 29 GMO INTERNATIONAL CORE FUND (A Series of GMO Trust) PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham and Mr. Darnell have been portfolio managers at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. Mr. Berkley has been with GMO and involved in portfolio management for more than ten years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO International Core Fund returned 8.2% for the fiscal year ended February 29, 2000 as compared to 25.4% for the MSCI EAFE Index. The Fund's disappointing performance comes from stock selection that emphasized value stocks (those companies that are cheaper on price-to-book, price-to-earnings and other measures) and smaller capitalization stocks. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in common stocks throughout the period. In international markets, the fiscal year was characterized by explosive performance of the technology and telecommunications sectors. This effect was particularly strong in the fourth quarter of 1999, during which period the MSCI EAFE Growth Index returned 25.6% versus 8.9% for MSCI EAFE Value. While this paralleled the run-up in the U.S. NASDAQ Index, the EAFE Index contains relatively few pure Internet and information technology stocks. The international rally focused more on the best available approximation, which is telecommunications stocks. Both fixed line and wireless companies performed very strongly in the markets, as did the related equipment providers. The optimism about these companies came despite the failure of many other growth stocks, such as pharmaceuticals and established software companies, to produce continued strong earnings growth. In contrast, many neglected stocks - typically smaller capitalization, value companies - had lackluster market performance for the fiscal year. Throughout the bull market of the late 1990's, growth stocks have enjoyed increasing "multiple expansion" to higher relative levels of price-to-book and price-to-earnings. As a result the spread, or discount, between the valuations of the cheaper stocks on such measures and the most expensive stocks has reached levels unprecedented in history. These wide gaps are considerably beyond what could possibly be justified by the relatively modest differences in consensus growth rate estimates. This is true even if no regression of the higher profitability of telecommunications stocks took place in the next 20 years, which would be contrary to the entire history of corporate competition. The fiscal year was marked by strong performance in the Asian markets. Japan rose by 42% in local currency, while Hong Kong and Singapore returned +66% and +59%, respectively. These markets benefited both from the dissipation of the crisis mentality and from the underlying recovery in the economic fundamentals of the region. The only two countries that had higher returns than all the Asian markets were Finland and Sweden (dominated by the returns of Nokia and Ericsson respectively). The major European markets showed mixed returns, with Germany and France leading the way, both with gains of 56% (+37% in U.S. dollars). The United Kingdom and Switzerland were the worst performing major markets, with slightly negative returns in local currency and worse in dollar terms. EFFECT OF COUNTRY ALLOCATION The Fund was successful in country allocation largely due to the overweight of the South East Asian markets. The Fund was also neutral weighted in Japan. Although this decision did not add to relative return, it represented the first time in the Fund's history that it was not underweight in Japan. The Fund was generally underweight in Europe. It suffered from being overweight in Austria, but benefited from underweights in the United Kingdom and Switzerland. EFFECT OF CURRENCY ALLOCATION The dollar strengthened by 5% over the fiscal year relative to an EAFE basket of currencies. This was due to the decline of the Euro, which lost 12% against the dollar in the Euro's debut year. The Fund was modestly overweight in the Euro, causing a slight negative contribution, which was mostly erased by the Fund's accompanying underweight in the underperforming Swiss franc. The Fund had also suffered from being underweight in the yen, which strengthened by 8% against the dollar, making currency allocation a small net negative for the fund. EFFECT OF STOCK SELECTION The poor performance in the fiscal year was almost entirely a result of stock selection, and in particular of the Fund's tilt towards value. Because of the opportunities represented by the wide dispersion in price-to-book ratios, the Fund is heavily concentrated in the cheaper stocks on price-to-book. Half of the Fund is invested in stocks within the cheapest 25% of the EAFE universe; only 10% of the Fund is invested outside the cheapest 50% of the universe. Those groups underperformed EAFE by -14.5% and -9.3% respectively for the fiscal year. The Fund was further hurt by its emphasis on smaller capitalization stocks, which underperformed significantly even after accounting for their overlap with value. Small stocks within EAFE underperformed by -17%, and small value stocks underperformed by -30%. Value stocks did very poorly whether defined on the basis of book, earnings, sales or dividend yield, which shows that the Fund's underperformance is not a consequence of focussing on price-to-book as a valuation measure. The Fund's more sophisticated value models, which make further adjustments to credit companies for growth and financial quality, fared equally poorly. In this overheated environment, reasonable adjustments did not suffice to make the most expensive price-to-book stocks look attractive. Much of the size and value underperformance was driven by telecommunications and technology stocks. Of that, over 7% of negative attribution was due to just five large capitalization stocks that doubled or tripled in price from expensive starting levels. PORTFOLIO STRUCTURE AND OUTLOOK Based on a careful analysis of current company fundamentals and valuation, GMO has decided to retain its substantial overweights in value stocks and small companies, in order to benefit from the inevitable rebound. While the growth oriented bull market of the last few years has been a difficult period for the International Core Fund, it leaves us at a moment of great opportunity. For value investors it is always darkest before the dawn. Markets overshoot fair value, and it is difficult to call the turning points. Yet the greater the overshoot past fair value, the more certain is the eventual rebound, and greater is the reward to those that participate. Furthermore, globalization and the monetary union have not eliminated the significance of country selection. This is apparent in the wide spread of returns during the last fiscal year and also in a wide spread in valuations between countries, even when adjusted for industry composition. To take advantage of these opportunities, the Fund remains underweight in Europe and particularly in favor of Asia ex-Japan. Despite the strong performance of Asia in 1999, those markets still are attractively valued relative to the rest of EAFE. Even within Europe there are attractive opportunities to favor cheaper markets such as Austria over more expensive ones such as the United Kingdom and Spain. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. - -------------------------------------------------------------------------------- COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO INTERNATIONAL SMALL COMPANIES FUND CLASS III SHARES AND THE SOLOMON EMI WORLD EX-U.S. INDEX AS OF FEBRUARY 29, 2000
- -------------------------------------------------------------------------------- Average Annual Total Return - -------------------------------------------------------------------------------- 1yr 5yr Since Inception - -------------------------------------------------------------------------------- 10/14/91 7.88% 5.27% 7.20% - --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Date GMO Int'l. Small Companies Fund MSCI EAFE Index Salomon EMI World ex-U.S. Index ---- ------------------------------- --------------- ------------------------------- 10/14/91 9900 10000 10000 12/31/91 9402 10162 9951 3/31/92 8956 8956 8978 6/30/92 9848 9146 9345 9/30/92 8892 9284 8852 12/31/92 8707 8925 8444 3/31/93 10051 9995 9709 6/30/93 11406 11001 10735 9/30/93 12432 11730 11393 12/31/93 13493 11831 11072 3/31/94 14900 12245 12062 6/30/94 15175 12871 12503 9/30/94 14768 12883 12415 12/31/94 14132 12752 12010 3/31/95 13708 12989 11936 6/30/95 14075 13084 11930 9/30/95 14694 13629 12402 12/31/95 14827 14181 12639 3/31/96 15535 14590 13365 6/30/96 16018 14821 13956 9/30/96 15731 14803 13640 12/31/96 16286 15039 13556 3/31/97 16178 14804 13306 6/30/97 17405 16724 14263 9/30/97 17417 16606 13688 12/31/97 15709 15305 12280 3/31/98 18400 17556 14392 6/30/98 18231 17742 14340 9/30/98 15548 15219 12170 12/31/98 17045 18363 13772 3/31/99 16970 18617 13967 6/30/99 18223 19090 14851 9/30/99 18616 19929 15607 12/31/99 18920 23314 17071 2/29/00 17907 22421 17347
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 100 bp on the purchase and 60 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of GMO Trust and the Shareholders of GMO Japan Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Japan Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 13, 2000 GMO JAPAN FUND (A Series of GMO Trust) Schedule of Investments - (Showing percentage of total net assets) February 29, 2000
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- COMMON STOCKS - 95.6% AUTOMOTIVE - 7.7% 7,000 Fuji Heavy Industries Ltd 44,668 9,000 Honda Motor Co Ltd 294,934 23,000 Mitsubishi Motors * 73,069 128,000 Nissan Motor Co * 483,546 10,000 Suzuki Motor Corp 161,759 ---------------- 1,057,976 ---------------- BANKING - 12.8% 18,000 Asahi Bank 76,191 6,000 Bank of Yokohama 21,410 9,000 Dai-Ichi Kangyo Bank 71,276 58,000 Daiwa Bank 144,135 32,000 Fuji Bank 249,347 10,000 Industrial Bank of Japan 78,194 5,000 Mitsubishi Trust & Banking 34,136 82,000 Mitsui Trust & Banking Co Ltd 126,895 93,000 Sakura Bank Ltd 530,800 28,000 Sumitomo Trust & Banking 158,281 23,000 Tokai Bank 105,312 15,000 Toyo Trust & Banking Co Ltd 43,011 98,000 Yasuda Trust & Banking * 124,892 ---------------- 1,763,880 ---------------- CHEMICALS - 3.1% 39,000 Daicel Chemical Industries Ltd 129,580 8,000 Dainippon Ink & Chemicals Inc 28,474 26,000 Mitsui Petrochemical Industries Ltd 187,684 25,000 Sekisui Chemical 78,285 ---------------- 424,023 ---------------- CONSTRUCTION - 9.9% 7,100 Daito Trust Construction Co Ltd 92,422 24,000 Daiwa House Industry Co Ltd 164,071 5,000 INAX Corp 25,443 4,000 JGC Corp * 9,649 24,000 Kajima Corp 61,172 39,000 Maeda Corp 110,054 70,000 Marubeni Corp 284,830 12,000 Nishimatsu Construction 36,484 15,000 Obayashi Corp 42,602 15,000 Okumura Corp 40,963
See accompanying notes to the financial statements. 1 GMO JAPAN FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- CONSTRUCTION - CONTINUED 30,000 Onoda Cement Co Ltd 45,332 28,000 Sekisui House Ltd 209,003 17,000 Shimizu Corp 41,009 13,000 Sumitomo Realty and Development Co Ltd 39,406 31,000 Taisei Corp 45,433 8,000 Tostem Corp 110,327 ---------------- 1,358,200 ---------------- CONSUMER GOODS - 5.3% 4,000 Citizen Watch Co 29,457 14,000 Ezaki Glico Co Ltd 64,740 4,700 Fuji Photo Film Co Ltd 206,645 18,000 Itochu Corp * 98,311 1,500 Nintendo Co Ltd 327,568 ---------------- 726,721 ---------------- ELECTRIC - 5.4% 2,000 Furukawa Electric Co Ltd 30,568 6,000 Matsushita Electric Industrial Co Ltd 174,776 43,000 Mitsubishi Electric Corp 380,856 27,000 Oki Electric Industry * 161,476 ---------------- 747,676 ---------------- ELECTRONICS - 5.0% 3,000 Aiwa Co 49,565 7,000 Fuji Electric Co * 28,929 1,000 Hirose Electric Co Ltd 133,904 5,000 Nichicon Corp 148,377 500 Rohm Co Ltd 162,259 16,000 Sanyo Electric Co 65,250 2,000 Sharp Corp 41,873 7,000 Toshiba Corp 57,157 ---------------- 687,314 ---------------- FINANCIAL SERVICES - 8.0% 2,000 Acom Ltd 212,280 2,000 Credit Saison Co 31,332 14,000 Daiwa Securities Co Ltd 222,384 34,000 New Japan Securities Co Ltd * 156,297 3,000 Nichiei Co Ltd (Kyoto) * 60,625 5,000 Nikko Securities 64,494 8,000 Orient Corp 29,421 200 Orix Corp 34,591 4,000 Promise Co 295,298 ---------------- 1,106,722 ----------------
2 See accompanying notes to the financial statements. GMO JAPAN FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- FOOD AND BEVERAGE - 2.1% 5,000 House Foods Corp 72,823 6,000 Kirin Brewery Co Ltd 71,603 7,000 Nippon Meat Packers Inc 64,358 700 Q.P. Corp 5,289 18,000 Snow Brand Milk Products Co Ltd 75,536 ---------------- 289,609 ---------------- HEALTH CARE - 1.3% 8,000 Sankyo Co Ltd 165,673 1,000 Shiseido Co Ltd 12,034 ---------------- 177,707 ---------------- LEISURE - 0.6% 4,000 Heiwa Corp 76,100 ---------------- MACHINERY - 4.4% 21,000 Amada Co Ltd 141,650 64,000 Ishikawajima-Harima Heavy Industries 65,250 63,000 Kawasaki Heavy Industries Ltd 65,951 18,000 Kubota Corp 52,433 97,000 Mitsubishi Heavy Industries 265,778 5,000 NHK Spring Co Ltd 15,748 ---------------- 606,810 ---------------- MANUFACTURING - 0.7% 7,000 Toyo Seikan Kaisha 91,439 ---------------- METALS AND MINING - 4.2% 9,000 Fujikara Ltd 35,392 157,000 Kobe Steel Ltd * 90,037 45,000 Mitsubishi Material * 149,515 1,000 Nitto Denko Corp 38,960 209,000 NKK Corp * 114,150 6,000 NSK Ltd 41,509 111,000 Sumitomo Metal Industries * 60,625 77,000 Tomen Corp 45,560 ---------------- 575,748 ---------------- OIL AND GAS - 2.4% 58,000 Cosmo Oil Co Ltd 63,356 55,900 Nippon Oil Co Ltd 196,417 19,600 Showa Shell Sekiyu 66,371 ---------------- 326,144 ----------------
See accompanying notes to the financial statements. 3 GMO JAPAN FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- PAPER AND ALLIED PRODUCTS - 0.8% 8,000 New Oji Paper Co Ltd 38,378 12,000 Sumitomo Forestry Co Ltd 71,112 ---------------- 109,490 ---------------- PHARMACEUTICALS - 2.9% 8,000 Chugai Pharmaceutical Co Ltd 122,343 9,000 Daiichi Pharmaceutical Co Ltd 116,745 4,000 Kyowa Hakko Kogyo Co Ltd 52,069 1,000 Ono Pharmaceutical Co Ltd 28,219 3,000 Taisho Pharmaceutical Co Ltd 84,657 ---------------- 404,033 ---------------- REAL ESTATE - 0.3% 5,000 Mitsui Fudosan Co Ltd 40,144 ---------------- RETAIL TRADE - 0.8% 1,000 Aoyama Trading 14,119 2,000 Jusco Co Ltd 28,164 9,000 Mitsubishi Corp 66,442 ---------------- 108,725 ---------------- SERVICES - 2.7% 9,000 Canon Sales Co Inc 118,793 6,000 Dainippon Printing Co Ltd 89,846 10,000 Nippon Shinpan Co 22,757 111,000 Nissho Iwai Corp * 75,782 6,000 Sumitomo Corp 66,524 ---------------- 373,702 ---------------- TECHNOLOGY - 6.0% 50,000 Hitachi Ltd 682,263 100 Keyence Corp 33,499 3,000 Pioneer Electronics Corp 95,307 200 TDK Corp 19,134 ---------------- 830,203 ---------------- TELECOMMUNICATIONS - 0.7% 2,000 Tokyo Broadcasting System Inc 91,211 ---------------- TEXTILES - 1.1% 27,000 Nisshinbo Industries Inc 101,507 6,000 Tokyo Style Co Ltd 49,156 ---------------- 150,663 ---------------- TOBACCO - 1.0% 20 Japan Tobacco Inc 142,916 ----------------
4 See accompanying notes to the financial statements. GMO JAPAN FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------- TRANSPORTATION - 2.4% 55,000 Kawasaki Kisen 75,600 18,000 Nippon Express Co Ltd 120,268 18,000 Seino Transportation Co Ltd 90,283 5,000 Toei Co Ltd 45,469 ---------------- 331,620 ---------------- UTILITIES - 4.0% 4,600 Chubu Electric Power Co Inc 65,364 1,400 Hokkaido Electric Power 16,797 800 Hokuriku Electric Power 9,860 2,000 Kokusai Denshin Denwa 186,610 12,500 Kyushu Electric Power Co Inc 148,605 1,300 Shikoku Electric Power 15,680 9,500 Tohoku Electric Power Co Inc 112,421 ---------------- 555,337 ---------------- TOTAL COMMON STOCKS (Cost $12,955,463) 13,154,113 ---------------- SHORT-TERM INVESTMENTS - 3.6% CASH EQUIVALENTS - 3.6% $ 500,000 Royal Bank of Canada Time Deposit, 5.81% due 3/01/00 500,000 ---------------- TOTAL SHORT-TERM INVESTMENTS (Cost $500,000) 500,000 ---------------- TOTAL INVESTMENTS - 99.2% (Cost $13,455,463) 13,654,113 Other Assets and Liabilities (net) - 0.8% 114,222 ---------------- TOTAL NET ASSETS - 100.0% $ 13,768,335 ---------------- ----------------
NOTES TO THE SCHEDULE OF INVESTMENTS: * Non-income producing security. See accompanying notes to the financial statements. 5 GMO JAPAN FUND (A Series of GMO Trust) Statement of Assets and Liabilities - February 29, 2000 - ----------------------------------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $13,455,463) (Note 1) $ 13,654,113 Foreign currency, at value (cost $117,894) (Note 1) 119,260 Cash 34,087 Dividends and interest receivable 5,273 Receivable for variation margin on open futures contracts (Notes 1 and 6) 7,601 ------------------- Total assets 13,820,334 ------------------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 5,710 Shareholder service fee 1,689 Accrued expenses and other liabilities 44,600 ------------------- Total liabilities 51,999 ------------------- NET ASSETS $ 13,768,335 ------------------- ------------------- NET ASSETS CONSIST OF: Paid-in capital $ 60,652,709 Distributions in excess of net investment income (113,032) Accumulated net realized loss (46,978,959) Net unrealized appreciation 207,617 ------------------- $ 13,768,335 ------------------- ------------------- NET ASSETS ATTRIBUTABLE TO CLASS III SHARES $ 13,768,335 ------------------- ------------------- SHARES OUTSTANDING - CLASS III 1,766,891 ------------------- ------------------- NET ASSET VALUE PER SHARE - CLASS III $ 7.79 ------------------- -------------------
6 See accompanying notes to the financial statements. GMO JAPAN FUND (A Series of GMO Trust) Statement of Operations - Year Ended February 29, 2000 - ----------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of foreign tax expense of $104,567) $ 592,560 Interest 66,027 --------------------- Total income 658,587 --------------------- EXPENSES: Management fee (Note 2) 225,115 Custodian fees 101,453 Audit fees 29,664 Transfer agent fees 28,898 Registration fees 2,016 Legal fees 1,767 Trustees fees (Note 2) 381 Miscellaneous 1,549 Fees waived or borne by Manager (Note 2) (165,728) --------------------- 225,115 Shareholder service fee - Class III (Note 2) 62,532 --------------------- Net expenses 287,647 --------------------- Net investment income 370,940 --------------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 17,041,585 Closed futures contracts 1,533,520 Foreign currency and foreign currency related transactions (87,803) --------------------- Net realized gain 18,487,302 --------------------- Change in net unrealized appreciation (depreciation) on: Investments 6,003,745 Open futures contracts (27,873) Foreign currency and foreign currency related transactions (7,191) --------------------- Net unrealized gain 5,968,681 --------------------- Net realized and unrealized gain 24,455,983 --------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 24,826,923 --------------------- ---------------------
See accompanying notes to the financial statements. 7 GMO JAPAN FUND (A Series of GMO Trust) Statement of Changes in Net Assets - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 -------------------- --------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 370,940 $ 350,253 Net realized gain (loss) 18,487,302 (26,170,871) Change in net unrealized appreciation (depreciation) 5,968,681 20,479,042 -------------------- --------------------- Net increase (decrease) in net assets resulting from operations 24,826,923 (5,341,576) -------------------- --------------------- Distributions to shareholders from: Net investment income - Class III (370,940) - In excess of net investment income (304,432) - -------------------- --------------------- (675,372) - -------------------- --------------------- Net share transactions - Class III (Note 5) (138,772,688) (15,421,445) -------------------- --------------------- Total decrease in net (114,621,137) (20,763,021) assets NET ASSETS: Beginning of period 128,389,472 149,152,493 -------------------- --------------------- End of period (including distributions in excess of net investment income of $113,032 and $23,093, respectively) $ 13,768,335 $ 128,389,472 -------------------- --------------------- -------------------- ---------------------
8 See accompanying notes to the financial statements. GMO JAPAN FUND (A Series of GMO Trust) Financial Highlights (For a Class III Share outstanding throughout each period) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------ ----------- ------------ ------------ ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 6.20 $ 6.36 $ 7.02 $ 8.52 $ 9.12 ------------ ----------- ------------ ------------ ----------- Income (loss) from investment operations: Net investment income (loss) 0.07 (b)(c) 0.01 0.01 - (b) (0.01) (b) Net realized and unrealized gain (loss) 1.92 (0.17) (0.67) (1.50) 0.79 ------------ ----------- ------------ ------------ ----------- Total from investment operations 1.99 (0.16) (0.66) (1.50) 0.78 ------------ ----------- ------------ ------------ ----------- Less distributions to shareholders: From net investment income (0.22) - - - - In excess of net investment income (0.18) - - (0.00) - From net realized gains - - - - (1.38) ------------ ----------- ------------ ------------ ----------- Total distributions (0.40) - - (0.00) (1.38) ------------ ----------- ------------ ------------ ----------- NET ASSET VALUE, END OF PERIOD $ 7.79 $ 6.20 $ 6.36 $ 7.02 $ 8.52 ------------ ----------- ------------ ------------ ----------- ------------ ----------- ------------ ------------ ----------- TOTAL RETURN (a) 31.54% 2.52% 9.40% 17.69% 8.29% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 13,768 $ 128,389 $ 149,152 $ 218,797 $ 126,107 Net expenses to average daily net assets 0.69% 0.69% 0.69% 0.70% (d) 0.92% Net investment income (loss) to average daily net assets 0.89% (c) 0.25% 0.21% 0.01% (0.13%) Portfolio turnover rate 56% 102% 128% 4% 23% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.03 $ 0.02 $ 0.02 $ 0.03 $ 0.01
(a) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Based on average month end shares outstanding. (c) Net investment income is affected by the timing of dividends earned and purchases and redemptions of Fund shares. (d) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .01% of average daily net assets. See accompanying notes to the financial statements. 9 GMO JAPAN FUND (A Series of GMO Trust) Notes to Financial Statements February 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Japan Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities of Japanese companies. The Fund's benchmark is the MSCI Japan Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and 10 GMO JAPAN FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. There were no forward foreign currency contracts outstanding as of February 29, 2000. FUTURES CONTRACTS The Fund may purchase and sell stock index futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock market. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 29, 2000. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into swap agreements to manage its exposure to the equity markets. The Fund enters into total return swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or 11 GMO JAPAN FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or that there may be unfavorable changes in the price of the security or index underlying these transactions. There were no open swap agreements outstanding as of February 29, 2000. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund had no securities out on loan. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to foreign currency and passive foreign investment company transactions, and differing treatments for redemptions in-kind. Gross gains resulting from such in-kind transactions amounted to $5,223,000. 12 GMO JAPAN FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U. S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Accumulated Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital --------------------------- -------------------------- ----------------------- $214,493 $ (2,983,282) $2,768,789
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases and fee on redemptions of Fund shares is .20% of the amount invested or redeemed. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $6,559 in purchase premiums and $124,393 in redemption fees. There is no premium for reinvested distributions. While no purchase premium is normally charged with respect to in-kind purchases of Fund shares, a purchase premium of up to .10% may be charged on certain in-kind purchases. 13 GMO JAPAN FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999 GMO earned a management fee at the annual rate of .75% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceeded .54% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000, was $381. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $22,412,400 and $156,077,563, respectively. At February 29, 2000, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation ---------------------------- -------------------------- ------------------------- --------------------- $14,012,800 $1,886,427 $2,245,114 $358,687
14 GMO JAPAN FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 81.7% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders could have a material effect. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 -------------------------------------------- -------------------------------------- Class III: Shares Amount Shares Amount ------------------- --------------------- ------------------ ---------------- Shares sold 877,279 $ 6,239,388 7,008,018 $ 42,026,700 Shares issued to shareholders in reinvestment of distributions 67,649 572,315 - - Shares repurchased (19,894,664) (145,584,391) (9,737,557) (57,448,145) ------------------- --------------------- ------------------ ---------------- Net decrease (18,949,736) $ (138,772,688) (2,729,539) $ (15,421,445) ------------------- --------------------- ------------------ ---------------- ------------------- --------------------- ------------------ ----------------
6. FINANCIAL INSTRUMENTS A summary of outstanding long futures contracts purchased at February 29, 2000 is as follows:
Number of Net Unrealized Contracts Type Expiration Date Contract Value Appreciation -------------------- ------------------------- -------------------- ------------------------ -------------------- 2 TOPIX March 2000 $ 314,779 $ 7,601 -------------------- --------------------
At February 29, 2000, the Fund had cash and/or securities to cover any margin requirements on open futures contracts. 15 GMO JAPAN FUND (A Series of GMO Trust) Federal Tax Information - (Unaudited) February 29, 2000 - -------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all the Fund's distributions are from investment company taxable income. At February 29, 2000, the Fund had a capital loss carryforward available to offset future capital gains, if any, of the following amounts:
YEAR OF EXPIRATION AMOUNT ------------------ ------ 2006 $ 11,631,832 2007 34,925,915
16 GMO JAPAN FUND (A Series of GMO Trust) PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham and Mr. Darnell have been portfolio managers at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. Mr. Berkley has been with GMO and involved in portfolio management for more than ten years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Japan Fund returned 31.5% for the fiscal year ended February 29, 2000. While this is strong absolute performance, it is disappointing when compared to 52.8% delivered by the MSCI Japan Index. The Fund's underperformance versus the benchmark comes from an emphasis on value stocks (those companies that are cheaper on price-to-book, price-to-earnings and other measures) and smaller capitalization stocks. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in common stocks throughout the period. The Fund's overweight in value and smaller capitalization stocks is driven by fundamental valuation analysis. Those segments of the market traded at unusually deep discounts even before the recent growth rally. These stocks still look attractive after making appropriate adjustments for relative growth prospects and firm quality. As a result, the Fund has nearly 90% of its weight in the cheap 50% of the market (defined on price-to-book), which underperformed the Index by -21% over the fiscal year. The Fund has a 21% overweight in the smallest 70% of the stocks within the MSCI universe, which underperformed the index by -31%. These factors explain all of the performance shortfall relative to the benchmark for the fiscal year. The high benchmark return was driven by exceptional returns in a narrow segment of the market, primarily information technology and telecommunications stocks. A handful of stocks had a very large impact on relative performance. Underweights in five such stocks (Sony, NTT, Softbank, Fujitsu and Murata Manufacturing) accounted for 15% (three quarters) of the performance shortfall. Softbank alone was responsible for -6% of relative performance. That stock, which had better than a 10-fold return for the fiscal year, is trading at a premium to the market valuation of its primary assets, which are stakes in extremely expensive Internet stocks such as Yahoo Japan. OUTLOOK The unprecedented attractive discounts available for smaller cap and value stocks make us optimistic that the Fund can add significant value going forward. The Fund's positions in smaller capitalization and value stocks give it a more domestic focus on the Index, away from the handful of "nifty" exporters and internet stocks that have been dominating performance. The Fund is positioned to do well as the Japanese economy continues to recover from its decade-long slump. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. - -------------------------------------------------------------------------------- COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO JAPAN FUND CLASS III SHARES AND THE MSCI JAPAN INDEX AS OF FEBRUARY 29, 2000
- -------------------------------------------------------------------------------- Average Annual Total Return - -------------------------------------------------------------------------------- 1yr 5yr Since Inception - -------------------------------------------------------------------------------- 6/8/90 31.02% 0.64% 0.65% - --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Date Japan Fund-III MSCI Japan ---- -------------- ---------- 6/8/90 9980 10000 6/30/90 9890 9737 9/30/90 7435 7252 12/31/90 8194 8300 3/31/91 9013 9015 6/30/91 8466 8535 9/30/91 8912 9039 12/31/91 8603 9041 3/31/92 7204 7045 6/30/92 7255 6488 9/30/92 7493 7369 12/31/92 7399 7101 3/31/93 8688 8424 6/30/93 9480 10053 9/30/93 10069 10403 12/31/93 9363 8911 3/31/94 11236 10360 6/30/94 12581 11582 9/30/94 11877 10965 12/31/94 11781 10821 3/31/95 11194 10591 6/30/95 10528 9921 9/30/95 10923 10367 12/31/95 11328 10896 3/31/96 11511 10935 6/30/96 11720 11020 9/30/96 11105 10404 12/31/96 9877 9207 3/31/97 8909 8121 6/30/97 10989 10043 9/30/97 9485 8759 12/31/97 7562 7028 3/31/98 7889 7172 6/30/98 7483 6844 9/30/98 6711 5820 12/31/98 8478 7382 3/31/99 9145 8282 6/30/99 9917 8912 9/30/99 11944 10323 12/31/99 11464 11925 2/29/00 10648 11112
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period. Past performance is not indicative of future performance. Information is unaudited. - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of GMO Trust and the Shareholders of Pelican Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Pelican Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 10, 2000 PELICAN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS - (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------------------- COMMON STOCKS - 89.4% BASIC MATERIALS - 3.5% 35,000 Abitibi-Consolidated Inc 310,625 5,000 Alcan Aluminum Ltd 165,000 5,000 Du Pont (E I) De Nemours & Co Inc 252,500 45,000 Engelhard Corp 613,125 20,000 FMC Corp * 966,250 5,000 Hercules Inc 82,500 32,500 International Paper Co 1,196,406 25,000 Pactiv Corp * 207,813 5,000 Weyerhaeuser Co 256,563 -------------- 4,050,782 -------------- CAPITAL GOODS - 6.7% 30,000 Amcol International Corp 472,500 10,000 Boeing Company 368,750 10,000 General Electric Co 1,321,875 12,500 Ingersoll-Rand Co 478,906 15,000 Lockheed Martin Corp 261,563 42,500 Pall Corp 839,375 5,000 Pitney Bowes Inc 247,500 50,000 Thomas & Betts Corp 1,121,875 20,000 United Technologies Corp 1,018,750 112,500 Waste Management Inc 1,687,500 -------------- 7,818,594 -------------- COMMUNICATION SERVICES - 3.3% 12,500 Bell Atlantic Corp 611,719 47,500 GTE Corp 2,802,505 12,500 SBC Communications Inc 475,000 -------------- 3,889,224 -------------- CONSUMER CYCLICALS - 13.8% 50,000 American Greetings Corp 862,500 15,000 Brunswick Corp 265,313 10,000 Delphi Automotive Systems Corp 166,875 45,000 Federated Department Stores * 1,650,938 15,000 General Motors Corp 1,140,938 15,000 Hilton Hotels Corp 105,000 50,000 Information Resources Inc * 390,625 30,000 Intermet Corp 337,500 25,000 Manpower Inc 817,188 10,000 Mascotech Industries Inc 139,981 62,500 Michelin SA Class B * 1,954,515 75,000 Modis Professional Services Inc * 1,181,250 22,500 Nestle SA ADR 1,896,883 75,000 Owens Corning 1,087,500 72,500 Saks Inc * 833,750 20,000 Stanley Works 460,000
See accompanying notes to the financial statements. 1 PELICAN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS - CONTINUED (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------------------- CONSUMER CYCLICALS - CONTINUED 13,000 TJX Cos Inc 207,188 115,000 Toys R Us Inc * 1,423,125 25,000 Wal-Mart Stores Inc 1,217,188 -------------- 16,138,257 -------------- CONSUMER STAPLES - 13.4% 15,000 Albertson's Inc 367,500 25,000 Anheuser-Busch Cos Inc 1,603,125 25,000 Bergen Brunswig Corp 123,438 12,500 ConAgra Inc 204,688 5,000 Coors (Adolph) Co 219,375 25,000 CVS Corp 875,000 37,500 Eastman Kodak 2,149,219 82,500 Kimberly-Clark Corp 4,264,219 7,500 McKesson HBOC Inc 145,313 15,000 MediaOne Group Inc * 1,177,500 50,000 Owens and Minor Holdings Co 550,000 137,500 Pepsi Bottling Group Inc 2,303,125 87,500 R. R. Donnelley & Sons Co 1,673,438 -------------- 15,655,940 -------------- ENERGY - 7.9% 12,500 Amerada Hess Corp 632,031 5,000 Baker Hughes Inc 129,375 15,000 Cabot Oil & Gas Corp Class A 237,188 75,000 Conoco Inc 1,476,563 12,500 EOG Resources Inc 190,625 162,500 Gulf Canada Resources Ltd * 528,125 7,500 Kerr-McGee Corp 335,625 50,000 Lasmo Plc ADR 237,500 25,000 Mitchell Energy Class B 526,563 60,000 Occidental Petroleum Corp 963,750 5,000 Texaco Inc 237,188 100,000 Union Pacific Resources Group Inc 893,750 67,500 Unocal Corp 1,805,625 50,000 USX - Marathon Group 1,081,250 -------------- 9,275,158 -------------- FINANCIALS - 22.2% 25,000 Allstate Corp 487,500 7,500 Avalonbay Communities Inc 253,125 10,000 Bank of America Corp 460,625 12,500 Bank One Corp 322,656 62,500 Block (H&R) Inc 2,742,188 20,000 Boston Properties Inc 606,250 62,500 Brandywine Realty Trust 1,000,000 35,000 Chase Manhattan Corp 2,786,875 72,500 Citigroup Inc 3,747,344 80,000 Equity Office Properties Trust 1,915,000 50,000 Equity Residential Properties Trust 1,996,875 7,500 First Union Corp 221,250
2 See accompanying notes to the financial statements. PELICAN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS - CONTINUED (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------------------- FINANCIALS - CONTINUED 162,500 JP Realty Inc 2,935,156 35,000 Mack-Cali Realty Corp 831,250 15,000 Reckson Associates Realty Corp 277,500 22,500 Spieker Properties Inc 902,813 75,000 Summit Properties Inc 1,425,000 50,000 United Dominion Realty Trust Inc 500,000 70,000 Washington Mutual Inc 1,548,750 32,500 Wells Fargo Co 1,074,531 -------------- 26,034,688 -------------- HEALTH CARE - 2.9% 65,000 Acuson Corp * 869,375 20,000 Aetna Inc 822,500 15,000 Lilly (Eli) and Co 891,563 12,500 Mylan Laboratories Inc 287,500 5,000 Smithkline Beecham Plc 280,938 12,500 Tenet Healthcare Corp * 218,750 -------------- 3,370,626 -------------- TECHNOLOGY - 7.9% 57,500 Compaq Computer Corp 1,430,313 5,000 Computer Sciences Corp * 394,063 12,500 Intel Corp 1,412,500 25,000 International Business Machines Corp 2,550,000 35,000 Parametric Technology Corp * 1,060,938 175,000 Storage Technology Corp * 2,231,250 5,000 Xerox Corp 108,438 -------------- 9,187,502 -------------- TRANSPORTATION - 3.6% 12,500 Airborne Freight Corp 231,250 15,000 AMR Corp * 793,125 42,500 Canadian Pacific Ltd 828,750 12,500 Delta Air Lines Inc 570,313 7,500 FedEx Corp * 262,031 75,000 Ryder System Inc 1,396,875 7,500 US Airways Group Inc * 140,156 -------------- 4,222,500 -------------- UTILITIES - 4.2% 5,000 Duke Energy Co 242,500 62,500 Niagara Mohawk Holdings Inc * 734,375 25,000 Questar Corp 348,438 47,500 Sempra Energy 855,000 50,000 Texas Utilities 1,631,250 30,000 Unicom Corp 1,134,375 -------------- 4,945,938 -------------- TOTAL COMMON STOCKS (Cost $100,885,312) 104,589,209 --------------
See accompanying notes to the financial statements. 3 PELICAN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS - CONTINUED (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 29, 2000
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------------------- PREFERRED STOCKS - 0.9% BASIC MATERIALS - 0.5% 25,000 Freeport-McMoran Corp 0.00% 550,000 -------------- ENERGY - 0.4% 12,500 Unocal Corp Convertible 6.25% 517,188 -------------- TOTAL PREFERRED STOCKS (Cost $1,519,458) 1,067,188 -------------- DEBT OBLIGATIONS - 9.1% TECHNOLOGY - 1.1% $ 1,500,000 International Business Machines Corp, 6.50% due 1/15/28 1,310,730 -------------- TRANSPORTATION - 0.7% 750,000 United Air Lines Inc, 9.13% due 1/15/12 766,478 -------------- U.S. GOVERNMENT - 7.3% 5,000,000 U.S. Treasury Bond, 11.13% due 8/15/03 5,668,750 1,250,000 U.S. Treasury Bond, 10.75% due 8/15/05 1,474,413 1,500,000 U.S. Treasury Note, 6.625% due 5/15/07 1,495,545 -------------- 8,638,708 -------------- TOTAL DEBT OBLIGATIONS (Cost $11,486,109) 10,715,916 -------------- TOTAL INVESTMENTS - 99.4% (Cost $113,890,879) 116,372,313 Other Assets and Liabilities (net) - 0.6% 660,399 -------------- TOTAL NET ASSETS - 100.0% $ 117,032,712 -------------- --------------
NOTES TO THE SCHEDULE OF INVESTMENTS: ADR - American Depositary Receipt * Non-income producing security. 4 See accompanying notes to the financial statements. PELICAN FUND (A Series of GMO Trust)
Statement of Assets and Liabilities - February 29, 2000 - -------------------------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $113,890,879) (Note 1) $ 116,372,313 Dividends and interest receivable 259,035 Foreign withholding taxes receivable 10,492 Receivable for investments sold 1,156,972 Receivable for Fund shares sold 19,600 Receivable for expenses waived or borne by Manager (Note 2) 24,628 ------------------- Total assets 117,843,040 ------------------- LIABILITIES: Due to custodian 312,313 Payable for investments purchased 276,361 Payable for Fund shares repurchased 51,319 Payable to affiliate for management fee (Note 2) 72,958 Accrued expenses 97,377 ------------------- Total liabilities 810,328 ------------------- NET ASSETS (equivalent to $11.15 per share based on 10,493,566 shares outstanding, unlimited shares authorized) $ 117,032,712 ------------------- ------------------- NET ASSETS CONSIST OF: Paid-in capital $ 101,442,760 Accumulated undistributed net investment income 245,785 Accumulated undistributed net realized gain 12,863,579 Net unrealized appreciation 2,480,588 ------------------- NET ASSETS $ 117,032,712 ------------------- -------------------
See accompanying notes to the financial statements. 5 PELICAN FUND (A Series of GMO Trust)
Statement of Operations - Year Ended February 29, 2000 - --------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $28,488) $ 3,307,288 Interest 1,537,928 ------------------- Total income 4,845,216 ------------------- EXPENSES: Management fee (Note 2) 1,582,393 Custodian and transfer agent fees 164,274 Audit fees 40,519 Registration fees 18,999 Legal fees 4,594 Trustees fees (Note 2) 2,053 Miscellaneous 10,215 ------------------- Total expenses 1,823,047 Less: expenses waived or borne by Manager (Note 2) (156,849) ------------------- Net expenses 1,666,198 ------------------- Net investment income 3,179,018 ------------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 45,410,308 Foreign currency and foreign currency related transactions (191) ------------------- Net realized gain 45,410,117 ------------------- Change in net unrealized appreciation (depreciation) on: Investments (50,353,648) Foreign currency and foreign currency related transactions (846) ------------------- Net unrealized loss (50,354,494) ------------------- Net realized and unrealized loss (4,944,377) ------------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (1,765,359) ------------------- -------------------
6 See accompanying notes to the financial statements. PELICAN FUND (A Series of GMO Trust)
Statement of Changes in Net Assets - ----------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED FEBRUARY 29, 2000 FEBRUARY 28, 1999 ------------------------ --------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 3,179,018 $ 3,881,844 Net realized gain 45,410,117 30,658,342 Change in net unrealized appreciation (depreciation) (50,354,494) (25,781,297) --------------------- --------------------- Net increase (decrease) in net assets resulting from operations (1,765,359) 8,758,889 --------------------- --------------------- Distributions to shareholders from: Net investment income (3,927,061) (4,037,021) Net realized gains (38,462,287) (31,637,977) --------------------- --------------------- (42,389,348) (35,674,998) --------------------- --------------------- Fund share transactions: (Note 5) Proceeds from sale of shares 9,423,293 20,859,512 Net asset value of shares issued to shareholders in payment of distributions declared 41,267,246 35,005,102 Cost of shares repurchased (113,439,710) (41,297,725) --------------------- --------------------- Net increase (decrease) in net assets resulting from Fund share transactions (62,749,171) 14,566,889 --------------------- --------------------- Total decrease in net assets (106,903,878) (12,349,220) NET ASSETS: Beginning of period 223,936,590 236,285,810 --------------------- --------------------- End of period (including accumulated undistributed net investment income of $245,785 and of $686,825, respectively) $ 117,032,712 $ 223,936,590 --------------------- --------------------- --------------------- ---------------------
See accompanying notes to the financial statements. 7 PELICAN FUND (A Series of GMO Trust) FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout Each Period) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------ ----------- ----------- ----------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 15.73 $ 17.78 $ 16.31 $ 14.52 $ 11.99 ------------ ----------- ----------- ----------- ------------ Income from investment operations: Net investment income 0.30 0.30 0.32 0.33 0.31 Net realized and unrealized gain (loss) (0.78) 0.43 4.13 2.27 3.04 ------------ ----------- ----------- ----------- ------------ Total from investment operations (0.48) 0.73 4.45 2.60 3.35 ------------ ----------- ----------- ----------- ------------ Less distributions to shareholders: From net investment income (0.36) (0.31) (0.40) (0.27) (0.29) From net realized gains (3.74) (2.47) (2.58) (0.54) (0.53) ------------ ----------- ----------- ----------- ------------ Total distributions (4.10) (2.78) (2.98) (0.81) (0.82) ------------ ----------- ----------- ----------- ------------ NET ASSET VALUE, END OF PERIOD $ 11.15 $ 15.73 $ 17.78 $ 16.31 $ 14.52 ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- ----------- ------------ TOTAL RETURN (a) (5.80%) 3.89% 28.97% 18.40% 28.54% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 117,033 $ 223,937 $ 236,286 $ 207,369 $ 177,238 Net expenses to average daily net assets 0.93% 0.95% 0.95% 0.95% 1.05% Net investment income to average daily net assets 1.79% 1.68% 1.77% 2.10% 2.42% Portfolio turnover rate 32% 34% 28% 27% 32% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.02 $ 0.01 $ 0.01 $ 0.01 $ -
(a) The total returns would have been lower had certain expenses not been waived during the periods shown. 8 See accompanying notes to the financial statements. PELICAN FUND (A Series of GMO Trust) Notes to Financial Statements February 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES The Pelican Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC ("the Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which will issue a separate series of shares. The Fund seeks long-term growth of capital primarily through investment in equity securities. The Fund's benchmark is the Standard & Poor's 500 Composite Stock Market Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are 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. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term debt obligations with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the prevailing exchange rates each business day. Income and expenses denominated in foreign currencies are translated at prevailing exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indices. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, 9 PELICAN FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. At February 29, 2000 there were no open futures contracts. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. TAXES The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless a shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to market discount. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights table excludes these adjustments. 10 PELICAN FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - --------------------------------------------------------------------------------
Accumulated Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital --------------------------- -------------------------- ------------------- $307,003 $(307,003) $0
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific Fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 2. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .75% of average daily net assets. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), and extraordinary expenses) exceed .75% of average daily net assets. Prior to February 1, 2000 GMO earned a management fee paid monthly at the annual rate of .90% of average daily net assets. GMO had entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including transfer taxes), and extraordinary expenses) exceeded .95% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000, was $2,053. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 11 PELICAN FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- 3. PURCHASES AND SALES OF SECURITIES For the year ended February 29, 2000, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Proceeds ------------------ ------------------ U.S. Government securities $183,656 $2,729,981 Investments (non-U.S. Government securities) $53,939,572 $151,573,506
At February 29, 2000, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation ---------------------------- -------------------------- ------------------------- ------------------------- $114,827,597 $21,363,554 $19,818,838 $1,544,716
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 61.05% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 --------------------------- ----------------------- Shares sold 608,624 1,214,307 Shares issued to shareholders in reinvestment of distributions 3,145,991 2,112,963 Shares repurchased (7,496,586) (2,378,657) ---------------------- --------------------------- Net increase (decrease) (3,741,971) 948,613 Fund shares: Beginning of period 14,235,537 13,286,924 ---------------------- --------------------------- End of period 10,493,566 14,235,537 ---------------------- --------------------------- ---------------------- ---------------------------
12 PELICAN FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION - (UNAUDITED) FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- For fiscal year ended February 29, 2000, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 84.50% distributions as net capital gain dividends. 13 PELICAN FUND (A Series of GMO Trust) PORTFOLIO MANAGER Mr. Richard Mayo is responsible for the management of the Pelican Fund. Mr. Mayo has been a portfolio manager with GMO since its founding in 1977 and began his career in the late 1960's. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE We can think of only one way to describe the investment climate in 1999: "bizarre." The market as a whole traded at record levels on virtually all valuation metrics, but sector performances differed dramatically. Momentum - chasing the winners - dominated investment techniques. The shift of interest to growth stocks, then aggressive growth and technology funds, created extreme divergences in results for value managers and growth managers; the spread is now at 50 year extremes. Throughout this extraordinary time, we maintained our core valuation discipline. The majority of stocks did not participate in the "bull" markets of 1998 and 1999 - in fact, the "average" stock has been declining during this period and is now down 35%. In 1999, just 30 stocks accounted for all the return in the S&P 500. This is even more remarkable than 1998, when only 84 stocks drove the entire performance of the index, and most observers noted the incredible concentration of performance. We owned some of the winners - General Electric, WalMart, Intel, and Citigroup - but were steady sellers throughout the year as targets were reached/exceeded. Increasingly the market became technology focused. The Fund owned stocks in the sector but made the mistake of selling too early. Even though we adapted our analysis to account for the dramatic economic changes driven by technology and the Internet, we felt compelled to reduce or eliminate positions in these sectors due to valuation concerns. Not fully participating in technology was a major negative impact on performance. In the short term, however, risk has not been a concern for the market. This discipline and our concern about risk have been costly to performance. We were not fully invested at all times, and some of our low risk stocks lagged significantly. It has been a frustrating year and a half for value managers, but we have held our own versus our peers. Russell data shows us in the second quartile of value managers and confirms we are succeeding in delivering superior risk-adjusted return. More importantly, we are optimistic about the future because of the great opportunities that exist in the market today. The global economy has improved, and corporate profits should be robust. In addition, acquirers should be active - companies are actively seeking ways to augment growth. Current stock prices also look attractive to corporate insiders; in February 2000 alone, companies announced share repurchases worth $30 billion. The macro environment looks solid, but we're most excited by the compelling ideas in the portfolio today. We can participate in wireless through inexpensive Bell Atlantic shares or venture capital through Chase Manhattan. CVS operates the largest drugstore chain, has an industry-leading Internet presence and recently announced a $1 billion share repurchase. We think the portfolio is in a position to deliver the returns comparable to the first four days of the year, when the Pelican Fund outperformed the S&P 500 by 318 basis points and the NASDAQ Composite by 713 basis points. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. - -------------------------------------------------------------------------------- COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN PELICAN FUND AND THE S&P 500 INDEX AS OF FEBRUARY 29, 2000
- -------------------------------------------------------------------------------- Average Annual Total Return - -------------------------------------------------------------------------------- 1yr 5yr 10yr - -------------------------------------------------------------------------------- -5.80% 13.96% 12.93% - --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Date Pelican Fund S&P 500 ---- ------------ ------- 2/28/90 10000 10000 3/31/90 10093 10265 6/30/90 10416 10909 9/30/90 8934 9410 12/31/90 9505 10253 3/31/91 10981 11742 6/30/91 10927 11716 9/30/91 11305 12343 12/31/91 11872 13377 3/31/92 12140 13041 6/30/92 12551 13289 9/30/92 12821 13709 12/31/92 13384 14400 3/31/93 14645 15029 6/30/93 15362 15102 9/30/93 15920 15491 12/31/93 16075 15851 3/31/94 15669 15249 6/30/94 15614 15313 9/30/94 16741 16062 12/31/94 16570 16060 3/31/95 18093 17623 6/30/95 19607 19306 9/30/95 20874 20840 12/31/95 21511 22094 3/31/96 22739 23280 6/30/96 23335 24325 9/30/96 23707 25077 12/31/96 25962 27167 3/31/97 25962 27896 6/30/97 29113 32766 9/30/97 32201 35220 12/31/97 32851 36231 3/31/98 35977 41284 6/30/98 36229 42647 9/30/98 32458 38405 12/31/98 36683 46584 3/31/99 36524 48905 6/30/99 40270 52353 9/30/99 36640 49083 12/31/99 37698 56385 2/29/00 33761 52538
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period. Past performance is not indicative of future performance. Information is unaudited. - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of GMO Trust and the Shareholders of GMO Tax-Managed International Equities Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statement of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Tax-Managed International Equities Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 13, 2000 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ------------------------------------------------------------------------------------------- COMMON STOCKS - 95.6% AUSTRALIA - 4.4% 9,700 Amcor Ltd 35,744 6,000 Australia and New Zealand Banking Group Ltd 36,886 7,500 Bank of Western Australia 19,300 49,600 Boral Ltd * 70,976 6,200 Broken Hill Proprietary Ltd 61,274 30,100 Burswood Ltd 11,276 1,600 Coca Cola Amatil Ltd 3,174 7,500 Commonwealth Bank of Australia 115,116 4,700 Consolidated Rutile Ltd * 1,819 28,200 CSR Ltd 61,483 53,300 Email Ltd 67,432 102,200 MIM Holdings Ltd 64,649 164,800 National Australia Bank Ltd 2,165,925 17,000 News Corp Ltd 247,796 2,800 Normandy NFM Ltd * 6,191 21,800 North Broken Hill Peko Ltd 36,818 5,000 OPSM Protector Ltd 7,830 49,600 Origin Energy Ltd 38,047 16,000 Pioneer International Ltd 42,647 39,300 PMP Communications Ltd 50,927 1,654 Publishing & Broadcasting Ltd 15,432 98,500 QCT Resources Ltd 42,346 82,900 Resolute Ltd 12,728 81,100 Santos Ltd 190,763 120,000 Schroders Property 170,979 283,300 Telstra Corp 1,329,622 1,700 Weston (George) Foods Ltd 6,818 ------------ 4,913,998 ------------ AUSTRIA - 1.0% 300 Austria Tabakwerke AG 11,957 4,400 Bank Austria AG 191,472 1,000 Boehler Uddeholm (Bearer) 37,249 200 Brau Union AG 8,310 150 Oesterreichische Brau Beteiligungs AG 5,791 26,700 Voest-Alpine Stahl AG 822,574 ------------ 1,077,353 ------------ BELGIUM - 0.6% 3,900 Arbed SA 362,331 1,000 Bekaert SA 44,142 See accompanying notes to the financial statements. 1 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------- BELGIUM - CONTINUED 2,400 Compagnie Benelux Paribas SA 128,931 2,800 Compagnie Maritime Belge SA 121,307 ------------ 656,711 ------------ BRAZIL - 0.9% 2,940 Embratel Participacoes SA ADR 70,560 4,000,000 Metalurgica Gerdau SA 142,413 9,700 Tele Centro Oeste Celular ADR 87,300 970 Tele Centro Sul Participacoes ADR 69,961 1,000 Tele Leste Celular Participacoes SA ADR 40,500 1,649 Tele Nordeste Celular Participacoes ADR 98,528 5,420 Tele Norte Leste Participacoes ADR 138,210 1,100 Telecomunicacoes de Sao Paulo SA 37,606 530 Telesp Celular Participacoes SA ADR 28,554 4,080 Unibanco GDR 118,830 41,500 Usinas Siderurgicas de Minas Gerais SA (Usiminas) 136,262 ------------ 968,724 ------------ CZECH REPUBLIC - 0.3% 7,800 Komercni Banka AS * 194,216 600 Tabak AS 113,672 ------------ 307,888 ------------ DENMARK - 0.3% 2,700 Aarhus Oliefabrik Class A 60,031 33 Codan A/S * 2,546 100 Codan Forsikring 8,103 2,000 DFDS A/S 81,675 80 Kapital Holding AS 2,945 4,300 Korn-OG Foderstofkomp 94,769 6,900 SAS Danmark A/S 71,116 1,175 Unidanmark AS Class A (Registered) 67,025 ------------ 388,210 ------------ FINLAND - 0.6% 36,300 Finnair Class A 154,120 30,900 Kemira Oyj 193,368 1,100 Partek Oyj 14,403 42,300 Rautaruukki Oyj 232,129 3,300 Stora Enso Oyj Class A 33,518 ------------ 627,538 ------------ 2 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------- FRANCE - 9.0% 300 Axa SA 37,692 6,444 Banque Nationale de Paris 508,725 520 Bongrain 144,682 2,000 Brocacef Holding 25,032 38 Cap Gemini SA 10,463 5,640 Chargeurs International SA 313,306 3,270 Christian Dior 668,991 40 Colas SA 6,970 445 Compagnie Generale d'Industrie et de Participations 29,883 5,970 Compagnie Parisienne de Reescompte 310,371 1,880 Credit National 118,191 100 Damart SA 6,980 840 Dexia * 114,837 840 Dexia Strip * 40 2,440 Eiffage SA 122,154 2,000 Elf Aquitaine SA 313,857 910 Elf Gabon 81,478 9,300 Eramet 509,458 5,340 Eridania Beghin-Say SA 448,303 4,140 Esso S.A.F. 255,887 5,300 France Telecom SA 854,681 10 Fromageries Bel SA 6,778 4,945 Gaz et Eaux 285,648 10 Guyenne et Gascogne 3,687 1,480 Imetal 175,259 14,500 Michelin SA Class B 452,719 40 Nord-Est 1,010 14,700 Pechiney SA Class A 857,637 850 Pernod Ricard 42,963 5,000 Renault SA 199,289 11,220 Saint-Gobain 1,560,897 8,200 Sommer Allibert 181,575 4,790 Sylea (Bearer) 159,560 65,590 Usinor Sacilor 956,674 7,920 Vallourec 320,249 ------------ 10,085,926 ------------ GERMANY - 6.7% 1,100 Allianz AG 383,579 62,300 Bankgesellschaft Berlin AG * 986,660 17,950 BASF AG 818,273 10,400 Bayer AG 433,045 See accompanying notes to the financial statements. 3 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------- GERMANY - CONTINUED 1,150 Bilfinger & Berger 16,607 19,600 DaimlerChrysler AG 1,328,441 21,600 Deutsche Telekom 1,807,120 300 Escada AG 29,316 12,700 FAG Kugelfischer 106,374 800 Heidelberg Port-Zement 45,057 12,800 IWKA AG 213,191 100 Leirheit AG 3,033 1,000 Phoenix AG 9,916 2,700 Schmalbach-Lubeca 332,726 28,080 SKW Trostberg 167,611 3,900 Suedzucker AG 39,425 34,300 Thyssen Krupp AG * 827,209 5,590 Walter Bau AG 34,982 ------------ 7,582,565 ------------ HONG KONG - 3.9% 115,000 Amoy Properties Ltd 64,646 214,000 China Telecom Ltd * 1,972,876 76,100 Chinese Estates Holdings Ltd * 12,809 104,000 Goldlion Holdings Ltd 9,888 54,000 Hang Lung Development Co Ltd 41,977 4,000 Hang Seng Bank 36,105 10,000 Henderson Land Development Co Ltd 42,530 20,000 Hong Kong Land Holdings 25,400 215 Hong Kong Telecommunications 717 9,000 Hutchison Whampoa 141,080 260,000 Jardine International Motor Holdings Ltd 79,342 235,800 Jardine Matheson Holdings Ltd 825,300 417,000 Jardine Strategic Holdings Ltd 658,860 226,000 Kumagai Gumi Ltd 54,011 50,000 Mandarin Oriental ADR 25,750 55,000 New Asia Realty & Trust Class A 56,535 274,000 Oriental Press Group * 103,857 566,000 Regal Hotels International Ltd * 41,453 150,000 San Miguel Brewery Ltd 25,248 84,000 Sime Darby 26,983 212 Sino Land 101 18,000 Swire Pacific Ltd Class A 86,267 107,000 Tai Cheung Holdings Ltd 24,472 111,000 Wheelock and Co Ltd 74,164 ------------ 4,430,371 ------------ 4 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------- HUNGARY - 0.3% 15,200 Danubius Hotel & Spa * 324,786 ------------ INDIA - 0.3% 3,000 Grasim Co 29,625 20,000 Grasim Co (Registered Shares) 197,500 10,000 Indian Rayon & Industries GDR 20,750 30,000 Indo Gulf Fertilizers GDR 50,250 ------------ 298,125 ------------ INDONESIA - 0.7% 236,500 Astra International * 117,056 115,500 Gudang Garam 192,500 1,775,000 Matahari Putra Prima Tbk * 239,057 318,000 PT Daya Guna Samudera * 67,455 151,500 PT Indofood Sukses Makmur Tbk * 125,485 105,000 United Tractors * 91,919 ------------ 833,472 ------------ IRELAND - 0.1% 29,100 Crean (James) * 7,564 16,000 Greencore Group 46,212 29,100 Oakhill Group Plc * 11,206 ------------ 64,982 ------------ ITALY - 4.8% 3,000 Banco Ambrosiano Veneto SPA (Non Convertible) 6,210 5,090 Beni Stabili SPA * 2,739 4,000 Burgo (Cartiere) SPA 23,491 2,000 Buzzi Unicem SPA * 7,413 13,000 Caffaro 13,692 22,400 Danieli and Co SPA (Non Convertible) 50,464 221,000 ENI SPA 1,027,668 13,540 Fiat SPA (Non Convertible) 195,013 3,800 Fila Holding SPA ADR * 32,300 71,100 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 323,776 4,000 Immsi SPA * 9,165 5,750 Luxottica Group ADR 139,797 10,000 Pirelli & Co 22,288 2,000 Pirelli & Co (Non Convertible) 3,841 280 Reno de Medici SPA 636 5,090 San Paolo IMI SPA 80,367 See accompanying notes to the financial statements. 5 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------- ITALY - CONTINUED 4,000 Sirti SPA 9,435 5,000 Sorin Biomedica SPA 20,747 252,200 Telecom Italia Mobile SPA 3,435,699 ------------ 5,404,741 ------------ JAPAN - 24.6% 3,000 77 Bank Ltd 22,175 43,000 Aida Engineering 158,136 20,300 Aoki International 63,752 18,000 Atsugi Nylon Industrial * 16,385 9,000 Bandai Co 344,909 103,000 Bank Of Tokyo-Mitsubishi 1,261,071 12,000 Brother Industries Ltd 25,670 409,000 Cosmo Oil Co Ltd 446,771 182,000 Daido Steel Co Ltd 248,509 4,000 Dainippon Pharmaceutical Co Ltd 31,132 79,000 Daio Paper Corp 450,894 13,500 Daito Trust Construction Co Ltd 175,732 7,000 Dowa Mining Co 11,024 67,000 Ezaki Glico Co Ltd 309,827 1,000 Fanuc Co 97,401 18,000 Fuji Bank 140,258 55,000 Fukuyama Transporting Co Ltd 392,017 87,000 Furukawa Co Ltd * 128,296 16,000 Gunze Ltd 40,781 4,000 Heiwa Corp 76,100 111,000 Heiwa Real Estate Co Ltd 230,376 21,000 Hitachi Ltd 286,550 59,000 Hitachi Metals Ltd 317,946 19,000 Hokuriku Bank * 39,261 14,000 Honda Motor Co Ltd 458,787 73,000 Ishikawajima-Harima Heavy Industries 74,425 93,000 Itoham Foods Inc 364,025 23,000 Izumiya Co Ltd 136,717 83,000 JACCS Co 293,150 13,000 Japan Radio Co 134,905 11,000 JGC Corp * 26,535 211,000 Joshin Denki Co Ltd 505,148 66,000 Kamigumi Co Ltd 258,341 68,000 Kandenko Co 245,123 95,000 Kansai Paint Co 211,005 6,000 Kawasaki Heavy Industries Ltd 6,281 6 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------- JAPAN - CONTINUED 1,000 Kissei Pharmaceutical Co Ltd 16,840 1,000 Kokusai Denshin Denwa 93,305 78,000 Konica Corp 349,333 18,000 Kubota Corp 52,433 98,000 Kurabo Industries Ltd 115,971 5,000 Kyodo Printing 17,705 66,000 Kyudenko Corp 187,447 26,000 Kyushu Electric Power Co Inc 309,098 56,000 Maeda Road Construction 226,844 124,000 Marubeni Corp 504,556 16,000 Matsushita Electric Industrial Co Ltd 466,069 7,000 Meiji Milk Products 43,967 65,000 Meiji Seika Kaisha Ltd 431,933 55,000 Misawa Homes 170,224 32,000 Mitsubishi Belting 71,658 87,000 Mitsubishi Corp 642,274 8,000 Mitsubishi Gas Chemical Co Inc 14,710 253,000 Mitsubishi Heavy Industries 693,214 140,000 Mitsubishi Material * 465,159 86,000 Mitsubishi Paper Mills Ltd 93,159 28,000 Mitsui OSK Lines Ltd 44,604 30,000 Mitsui Trust & Banking Co Ltd 46,425 80,000 Mizuno Corp 192,253 24,000 MOS Food Services 218,907 22,000 Nachi Fujikoshi Co 29,839 106,000 Nagase & Co 361,841 6,000 Nichirei 15,238 2,000 Nintendo Co Ltd 436,758 76,000 Nippon Beet Sugar 110,000 72,000 Nippon Chemical 169,096 6,000 Nippon Express Co Ltd 40,089 66,000 Nippon Flour Mills Co Ltd 148,996 79,000 Nippon Hodo Co 327,923 273,000 Nippon Oil Co Ltd 959,246 105,000 Nippon Paint Co 253,288 14,000 Nippon Shinpan Co 31,860 185,000 Nippon Suisan Kaisha Ltd 277,866 See accompanying notes to the financial statements. 7 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------- JAPAN - CONTINUED 74,000 Nippon Synthetic Chemical 110,473 16,000 Nishimatsu Construction 48,646 300,000 Nissan Motor Co * 1,133,312 3,000 Nisshin Oil Mills Ltd 8,056 445,000 Nisshin Steel Co Ltd 413,181 42,000 Nisshinbo Industries Inc 157,899 667,000 NKK Corp * 364,298 157,000 NOF Corp 354,431 45,000 NTN Corp 98,721 81,000 Okumura Corp 221,201 101,000 Onoda Cement Co Ltd 152,619 202,000 Orient Corp 742,870 1,000 Orix Corp 172,955 1,000 Rohm Co Ltd 324,519 16,000 Ryosan Co 262,018 5,000 Sankyo Co Ltd 103,546 22,000 Sanyo Electric Co 89,718 94,000 Seino Transportation Co Ltd 471,476 48,000 Sekisui Chemical 150,307 5,000 Sekisui House Ltd 37,322 2,000 Seven-Eleven Japan Co 201,356 3,000 Shikoku Electric Power 36,184 28,000 Shimizu Corp 67,544 6,000 Shionogi and Co Ltd 85,749 20,000 Showa Shell Sekiyu 67,726 8,000 Snow Brand Milk Products Co Ltd 33,572 2,400 Sony Corp 710,027 4,000 Stanley Electric Co Ltd 30,877 5,000 Sumitomo Corp 55,437 10,000 Sumitomo Osaka Cement Co Ltd 37,504 9,000 Sumitomo Warehouse 22,939 2,000 Suzuki Motor Corp 32,352 2,000 Takara Standard Co 7,301 3,000 Takeda Chemical Industries Ltd 169,314 69,000 Tanabe Seiyaku Co Ltd 419,571 62,000 Tekken Construction * 64,904 50,000 TOA Corp 56,893 159,000 Toagosei Co Ltd 270,657 8 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------- JAPAN - CONTINUED 97,000 Tobishima Corp * 49,447 69,000 Tohoku Electric Power Co Inc 816,531 46,000 Tokai Carbon Co Ltd 74,535 13,000 Tokyo Gas Co 23,904 196,000 Tokyo Ink Manufacturing Co Ltd 360,402 14,000 Tokyo Style Co Ltd 114,697 25,000 Toshiba Tungaloy Co Ltd 46,197 4,000 Toyo Seikan Kaisha 52,251 3,000 Toyo Suisan Kaisha 18,570 30,000 Toyobo Co Ltd 39,598 32,000 Toyota Motor Corp 1,278,777 14,000 Uniden Corp 120,941 5,000 Yakult Honsha Co Ltd 41,919 6,000 Yamaha Motor Co 42,329 69,000 Yodogawa Steel Works 179,009 33,000 Yokogawa Bridge Corp 84,411 20,000 Yokohama Rubber Co 61,900 ------------ 27,852,436 ------------ KOREA - 0.9% 564 Cheil Jedang Corp 36,350 2,340 Chosun Brewery Co Ltd * 57,926 3,300 Dongwon Securities Co 67,394 8,965 Housing & Commercial Bank 159,706 5,558 Hyundai Industrial Development 33,414 4,621 Kookmin Bank 51,476 1,100 Korea Electric Power Corp 27,522 7,500 Korea Electric Terminal Co 84,210 190 Lotte Confectionery Co 22,677 2,100 Pacific Chemical Corp 33,233 660 Pohang Iron & Steel (a) 67,988 183 Samsung Electronics 41,418 550 Shinsegae Department Store 22,611 45 SK Telecom 167,093 3,780 SK Telecom ADR 169,864 ------------ 1,042,882 ------------ MALAYSIA - 2.1% 13,950 APM Automotive Holdings Berhad * 10,279 20,000 Berjaya Group Berhad 5,132 2,000 Cement Industries of Malaysia Berhad 1,632 15,000 Edaran Otomobil Berhad 63,158 See accompanying notes to the financial statements. 9 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------- MALAYSIA - CONTINUED 19,000 Genting Berhad 84,000 6,000 Golden Hope Plantations Berhad 5,337 125,000 IJM Corp Berhad Class A 140,132 105,000 Malayan Banking Berhad 472,500 1,000 Oriental Holdings Berhad 2,355 97,000 Resorts World Berhad 352,263 6,990,000 Tan Chong International Ltd 1,059,799 93,000 Tan Chong Motor Holdings Berhad 43,808 4,650 Warisan TC Holdings Berhad * 2,814 84,000 YTL Corp 154,737 ------------ 2,397,946 ------------ MEXICO - 0.1% 13,000 Grupo Industrial Bimbo Class A * 21,454 660 Grupo Televisa SA GDR * 50,696 2,650 TV Azteca SA ADR 36,934 ------------ 109,084 ------------ NETHERLANDS - 3.2% 7,800 Boskalis Westminster NV 173,844 14,780 Buhrmann NV Maastricht 389,175 8,400 DSM NV 275,528 2,600 Gamma Holdings NV 87,110 11,900 Hollandsche Beton Groep NV 164,977 8,175 KLM-Konin Luchtvaart Mij NV 152,294 27,000 Kon Bolswessanen 291,136 2,700 Koninklijke KPN NV 343,254 2,400 Koninklijke Ten Cate 90,113 3,100 Koninklijke Volker Wessels 49,245 7,600 Nedlloyd 174,142 22,100 Royal Dutch Petroleum 1,155,116 5,600 Stork NV 68,740 5,906 Van Ommeren Vopak * 139,023 400 Wereldhave NV 16,232 ------------ 3,569,929 ------------ NEW ZEALAND - 0.3% 83,000 Air New Zealand Class B 84,640 200,000 Brierley Investment Ltd 35,934 105,400 Fletcher Challenge Buildings 118,743 10,000 Telecom Corp of New Zealand 41,276 165,000 Trans Tasman Properties Ltd * 18,429 19,000 Tranz Rail Holdings Ltd 31,370 ------------ 330,392 ------------ 10 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------- NORWAY - 0.9% 93,100 Christiania Bank OG Kreditkasse 471,687 136,500 Den Norske Bank Class A 494,677 400 Norske Skogindustrier ASA Class B 12,183 ------------ 978,547 ------------ POLAND - 0.6% 1,700 Bank Slaski SA 105,306 11,400 Exbud SA * 107,294 5,900 Prokom Software SA 412,929 ------------ 625,529 ------------ PORTUGAL - 1.1% 912 Cimpor-Cimentos de Portugal SGPS SA (Registered) 13,838 55,300 Electricidade de Portugal 1,103,667 1,400 Inapa-Invest Particip Gesta 10,581 5,000 Mota & Co SA 47,704 2,800 Portucel Industrial Empresa 22,051 500 Salvador Caetano 9,483 ------------ 1,207,324 ------------ RUSSIA - 0.1% 2,600 Lukoil Holding Co ADR 108,550 ------------ SINGAPORE - 4.2% 399,900 Asia Food & Properties Ltd * 135,721 525,000 Chuan HUP Holdings Ltd 121,831 1,500 Creative Technology Ltd 32,633 17,000 Cycle & Carriage Ltd 37,478 4,652 DBS Group Holdings Ltd 57,485 43,500 Fraser & Neave 121,135 1,018,000 Goldtron * 233,283 74,000 Hai Sun Hup Group Ltd 31,125 100,000 Haw Par Brothers International Ltd 170,563 278,500 Hotel Properties Ltd 245,588 66,900 Inchcape Berhad 52,008 15,750 Oversea-Chinese Banking Corp 99,597 16,330 Overseas Union Bank 72,475 235,100 Singapore Airlines Ltd (Registered) 2,182,282 456,100 Singapore Telecom 740,895 241,400 Straits Trading Co Ltd 252,086 See accompanying notes to the financial statements. 11 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------- SINGAPORE - CONTINUED 9,100 Times Publishing Ltd 18,583 19,008 United Overseas Bank 120,199 208,000 Van Der Horst Ltd * 53,698 ------------ 4,778,665 ------------ SPAIN - 2.6% 61,100 Aceralia SA 714,712 14,700 Acerinox SA (Registered) 529,301 11,100 Azucarera Ebro Agricolas 135,719 3,000 Banco Bilbao Vizcaya SA 43,613 6,200 Cristaleria Espanola SA 216,557 100 Empresa Nacional de Celulosas SA 2,069 20,414 Endesa 431,789 2,000 Europistas Concesionaria Espanola SA * 10,783 200 Fabricacion de Automoviles Renault de Espana SA 8,973 6,600 FENOSA SA 136,614 19,200 Hidro Cantabrico 303,336 17,400 Repsol SA 329,174 11,500 Tableros Defibras Class B 115,145 ------------ 2,977,785 ------------ SWEDEN - 1.0% 1,500 Custos AB 37,128 1,200 Custos AB Class B 29,839 5,100 Gambro AB Class A 35,485 1,600 Gambro AB Class B 11,315 4,400 Mo Och Domsjo AB Class B 124,467 6,400 Skanska AB Class B 220,463 18,900 SSAB Swedish Steel Class A 229,594 9,700 SSAB Swedish Steel Class B 115,621 1,600 Svenska Cellulosa Class B 38,964 42,900 Trelleborg AB Class B 300,941 ------------ 1,143,817 ------------ SWITZERLAND - 3.2% 600 BK Vision AG (Bearer) * 109,686 110 Bobst AG (Bearer) 141,753 200 Bobst AG (Registered) 125,989 100 Financiere Richemont AG Class A 230,760 1,200 Hero AG 136,658 260 Hilti AG (Participating Certificate) 205,706 12 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------- SWITZERLAND - CONTINUED 500 Merkur Holding AG (Registered) 143,850 300 Movenpick Holdings (Bearer) 140,254 160 Nestle AG (Registered) 269,767 200 Novartis AG (Registered) 254,615 420 Pargesa Holdings SA (Bearer) 792,975 500 Rieter Holdings AG (Registered) 308,379 200 Schweizerische Industrie-Gesellschaft Holding AG (Registered) 120,235 600 Sika Finanz AG (Bearer) 198,154 50 Societe Generale de Surveillance Holding SA (Registered) * 20,079 360 Swatch Group AG (Bearer) 387,101 20 Swiss Reinsurance (Bearer) 32,151 ------------ 3,618,112 ------------ THAILAND - 1.0% 20,500 Advanced Info Service Public Co Ltd (Foreign Registered) * 318,405 137,000 Bangkok Bank Pcl (Foreign Registered) * 221,055 61,600 CP Feedmill Public Co Ltd (Foreign Registered) * 223,030 1,420,000 Quality House Co Ltd (Foreign Registered)* 134,120 227,500 Thai Farmers Bank Pcl (Foreign Registered) * 214,876 ------------ 1,111,486 ------------ UNITED KINGDOM - 15.3% 40,700 Anglian Water Plc 286,238 15,100 Arcadia Group 12,038 78,200 Arjo Wiggins Appleton Plc 195,052 45,800 Associated British Food 255,769 5,649 AstraZeneca Plc 187,183 30,000 Bass Plc 318,019 45,200 Beazer Holmes Plc 79,204 18,000 Berkley Group 127,160 48,900 BICC Group 45,546 75,900 Billiton Plc 310,333 42,200 BP Amoco Plc 324,768 68,224 British Airways Plc 322,028 33,500 British Telecom Plc 584,906 61,295 BTR Siebe Plc 281,098 17,200 Christian Salvesen Plc 36,385 69,200 Coats Viyella 44,516 622,540 Corus Group Plc 1,031,911 66,900 Courtaulds Textiles Plc 132,543 See accompanying notes to the financial statements. 13 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------- UNITED KINGDOM - CONTINUED 118,500 De Vere Group Plc 508,363 91,100 Delta Plc 154,601 234,165 Elementis Plc 266,159 32,400 Glynwed International 110,608 700 Hambros Plc Class A * 1,989 31,100 Hazlewood Foods 37,067 27,500 Hepworth Plc 65,119 167,500 HSBC Holdings Plc 1,950,126 15,300 Hyder Plc 48,609 51,500 Inchcape Plc 197,154 16,500 Johnson Matthey 188,065 41,000 Laird Group 125,242 59,400 Lonrho Plc 637,648 374,300 MFI Furniture Group 338,284 7,200 Morgan Crucible 28,416 11,000 National Power 64,989 47,100 Northern Foods Plc 68,778 227,200 Pilkington 238,515 27,100 Powergen Plc 186,848 18,000 Rank Group Plc 44,897 44,900 Rexam Plc 129,890 3,300 RMC Group 38,030 4,162 Royal Bank of Scotland Group 54,731 66,800 Royal & Sun Alliance Insurance Group 364,870 12,700 Safeway Plc 31,026 28,300 Scottish Power Plc 214,891 23,200 Severn Trent Plc 193,195 8,300 Signet Group Plc 6,650 119,100 Smithkline Beecham Plc 1,333,982 74,891 Smiths Industries Plc 911,528 3,200 Somerfield Plc 2,766 91,100 Storehouse Plc 63,998 5,892 Sun Life & Province Holding 32,322 7,400 Tate & Lyle 29,964 27,100 Taylor Woodrow Plc 57,969 7,700 Tesco 20,847 33,816 Thames Water Plc 371,016 14 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares Description Value ($) - ------------------------------------------------------------------------------------------- UNITED KINGDOM - CONTINUED 45,200 Thistle Hotels Plc 103,822 414,100 TI Group Plc 2,201,399 33,600 Unigate 154,619 10,714 Unilever Plc 65,244 3,200 United Biscuits Plc 13,160 69,800 United Utilities 721,192 20,000 Vodafone Group Plc 112,163 37,800 Wilson (Connolly) Holdings 77,277 14,000 Wimpey (George) 22,543 35,100 Yorkshire Water 143,375 ------------ 17,308,643 ------------ VENEZUELA - 0.5% 15,800 Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR 526,338 ------------ TOTAL COMMON STOCKS (Cost $111,795,827) 107,652,855 ------------ PREFERRED STOCKS - 2.3% BRAZIL - 0.4% 3,000,000 Cemig 49,353 995,355 Gerdau SA 27,675 3,540,000 Itaubanco SA (Registered) 281,079 22,000 Usinas Siderurgicas de Minas Gerais SA (Usiminas) 119,356 ------------ 477,463 ------------ GERMANY - 1.3% 6,300 Draegerwerk AG 49,736 17,200 Dyckerhoff AG (Non Voting) 442,961 300 Escada AG 28,796 5,800 Krones AG 161,935 19,800 MAN AG 397,452 25,000 Villeroy & Boch AG (Non Voting) 221,433 4,000 Volkswagen AG 91,269 60 Walter Bau AG 399 ------------ 1,393,981 ------------ ITALY - 0.5% 1,000 Banca Nazionale dell'Agricoltura (BNA) (Non Convertible) 1,261 21,210 Fiat SPA 359,391 10,050 IFI-Istituto Finanziario 254,469 1,000 La Rinascente SPA 3,485 ------------ 618,606 ------------ ------------ See accompanying notes to the financial statements. 15 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 Shares/ Par Value Description Value ($) - ------------------------------------------------------------------------------------------- KOREA - 0.1% 1,300 Samsung Electronics (Non Voting) 118,380 ------------ TOTAL PREFERRED STOCKS (Cost $2,663,638) 2,608,430 ------------ CONVERTIBLE SECURITIES - 0.1% POLAND - 0.1% DEM 140,000 Elektrim SA, 2.00% due 5/30/04 110,263 ------------ TOTAL CONVERTIBLE SECURITIES (Cost $96,905) 110,263 ------------ RIGHTS & WARRANTS - 0.0% HONG KONG - 0.0% 5,100 Chinese Estates Holdings Ltd Warrants 11/24/00 * 295 10,000 Mandarin Oriental International Ltd Rights 3/06/00 * 100 1 Mandarin Oriental International Ltd Rights 3/06/00 * - ------------ 395 ------------ MALAYSIA - 0.0% 21,000 YTL Corp Berhad Warrants 6/26/09 * 16,026 ------------ THAILAND - 0.0% 75,000 Quality House Co Ltd Warrants 10/30/02 * - ------------ TOTAL RIGHTS & WARRANTS (Cost $3,285) 16,421 ------------ SHORT-TERM INVESTMENTS - 0.3% CASH EQUIVALENTS - 0.3% $ 300,000 Banque Nationale Paribas (London) Time Deposit, 5.81% due 3/01/00 300,000 ------------ TOTAL SHORT-TERM INVESTMENTS (Cost $300,000) 300,000 ------------ TOTAL INVESTMENTS - 98.3% (Cost $114,859,655) 110,687,969 Other Assets and Liabilities (net) - 1.7% 1,935,281 ------------ TOTAL NET ASSETS - 100.0% $112,623,250 ------------ ------------
16 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 NOTES TO THE SCHEDULE OF INVESTMENTS: ADR American Depositary Receipt GDR Global Depository Receipt (a) Valued by management (Note 1). * Non-income producing security. See accompanying notes to the financial statements. 17 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) Schedule of Investments - continued (showing percentage of total net assets) February 29, 2000 - -------------------------------------------------------------------------------- At February 29, 2000, industry sector diversification of the Fund's equity investments was as follows: INDUSTRY SECTOR (UNAUDITED) Telecommunications 11.4% Banking 10.0 Metals and Mining 9.0 Conglomerates 7.3 Consumer Goods 6.9 Automotive 5.8 Machinery 5.6 Construction 5.0 Energy Services 4.9 Chemicals 4.1 Utilities 4.1 Transportation 4.0 Services 3.4 Health Care 2.5 Financial Services 2.4 Textiles 1.6 Retail Trade 1.6 Paper and Allied Products 1.5 Electronic Equipment 1.4 Communications 0.9 Food and Beverage 0.8 Insurance 0.8 Real Estate 0.7 Computers 0.4 Aerospace 0.1 Miscellaneous 3.8 -------- 100.0% -------- --------
18 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Statement of Assets and Liabilities - February 29, 2000 - -------------------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $114,859,655) (Note 1) $ 110,687,969 Foreign currency, at value (cost $2,050,929) (Note 1) 1,974,984 Cash 71,564 Receivable for securities sold 26,699 Dividends and interest receivable 75,123 Foreign withholding taxes receivable 40,222 Receivable for expenses waived or borne by Manager (Note 2) 27,784 ------------------ Total assets 112,904,345 ------------------ LIABILITIES: Net payable for open forward foreign currency contracts 111,459 Accrued capital gain and repatriation taxes payable (Note 1) 35,505 Payable to affiliate for (Note 2): Management fee 48,924 Shareholder service fee 13,590 Accrued expenses 71,617 Total liabilities 281,095 ------------------ NET ASSETS $ 112,623,250 ------------------ ------------------ NET ASSETS CONSIST OF: Paid-in capital $ 117,974,022 Distributions in excess of net investment income (598,543) Accumulated net realized loss (353,044) Net unrealized depreciation (4,399,185) ------------------ $ 112,623,250 ------------------ ------------------ NET ASSETS ATTRIBUTABLE TO: Class III Shares $ 112,623,250 ------------------ ------------------ SHARES OUTSTANDING: Class III 10,802,456 ------------------ ------------------ NET ASSET VALUE PER SHARE: Class III $ 10.43 ------------------ ------------------
See accompanying notes to the financial statements. 19 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Statement of Operations - Year Ended February 29, 2000 - --------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of foreign tax expense of $154,281) $ 1,450,802 Interest 117,775 ------------------- Total income 1,568,577 ------------------- EXPENSES: Management fee (Note 2) 411,732 Custodian fees 187,057 Audit fees 38,640 Transfer agent fees 27,446 Registration fees 5,319 Legal fees 1,096 Trustees fees (Note 2) 848 Miscellaneous 3,190 Fees waived or borne by Manager (Note 2) (261,860) ------------------- 413,468 Shareholder service fee - Class III (Note 2) 114,370 ------------------- Net expenses 527,838 ------------------- Net investment income 1,040,739 ------------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (329,830) Foreign currency, forward contracts and foreign currency related transactions (301,855) ------------------- Net realized loss (631,685) ------------------- Change in net unrealized appreciation (depreciation) on: Investments (Note 1) (4,234,628) Foreign currency, forward contracts and foreign currency related transactions (115,890) ------------------- Net unrealized loss (4,350,518) ------------------- Net realized and unrealized loss: (4,982,203) ------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (3,941,464) ------------------- -------------------
20 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Statement of Changes in Net Assets - --------------------------------------------------------------------------------
PERIOD FROM JULY 29, 1998 YEAR ENDED (COMMENCEMENT OF OPERATIONS) FEBRUARY 29, 2000 THROUGH FEBRUARY 28, 1999 -------------------- --------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,040,739 $ 59,031 Net realized loss (631,685) (44,913) Change in net unrealized appreciation (depreciation) (4,350,518) (48,667) -------------------- -------------------- Net decrease in net assets resulting from operations (3,941,464) (34,549) -------------------- -------------------- Distributions to shareholders from: Net investment income - Class III (1,040,739) (58,701) In excess of net investment income - Class III (324,705) (8,556) -------------------- -------------------- (1,365,444) (67,257) -------------------- -------------------- Net share transactions - Class III (Note 5) 99,401,085 18,630,879 -------------------- -------------------- Total increase in net assets 94,094,177 18,529,073 NET ASSETS: Beginning of period 18,529,073 - -------------------- -------------------- End of period (including distributions in excess of net investment income of $598,543 and $27,931, respectively) $ 112,623,250 18,529,073 -------------------- -------------------- -------------------- --------------------
See accompanying notes to the financial statements. 21 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Financial Highlights (For a Class III Share outstanding throughout each period) - --------------------------------------------------------------------------------
PERIOD FROM JULY 29, 1998 YEAR ENDED (COMMENCEMENT OF OPERATIONS) FEBRUARY 29, 2000 THROUGH FEBRUARY 28, 1999 ----------------- ---------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.71 $ 10.00 ---------------- -------------- Income (loss) from investment operations: Net investment income 0.15(b) 0.04 Net realized and unrealized gain (loss) 0.70 (0.28) ---------------- -------------- Total from investment operations 0.85 (0.24) ---------------- -------------- Less distributions to shareholders: From net investment income (0.10) (0.04) In excess of net investment income (0.03) (0.01) ---------------- -------------- Total distributions (0.13) (0.05) ---------------- -------------- NET ASSET VALUE, END OF PERIOD $ 10.43 $ 9.71 ---------------- -------------- ---------------- -------------- TOTAL RETURN (a) 8.65% (2.44%)** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 112,623 $ 18,529 Net expenses to average daily net assets 0.69% 0.69% * Net investment income to average daily net assets 1.36% 0.87% * Portfolio turnover rate 5% 20% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.04 $ 0.12
* Annualized ** Not annualized. (a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Computed using average shares outstanding throughout the period. 22 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Notes to Financial Statements February 29, 2000 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Tax-Managed International Equities Fund (the "Fund"), which commenced operations on July 29, 1998, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high after-tax total return primarily through investment in non-U.S. equity securities. The Fund's benchmark is the GMO EAFE (After Tax). The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. 23 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 29, 2000. FUTURES CONTRACTS The Fund may purchase or sell index futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock market. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. At February 29, 2000, there were no open futures contracts. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into swap agreements to manage its exposure to the equity markets. The Fund enters into total return swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to 24 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 29, 2000, there were no open swap agreements. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the future, security, or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security, or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security, or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 29, 2000 there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purhasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. TAXES The 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"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U. S. federal income tax purposes. Therefore, no provision for U. S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. 25 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund has recorded a deferred tax liability in respect of unrealized appreciation on foreign securities of $35,505 for potential repatriation taxes at February 29, 2000. The accrual for repatriation taxes is included in net unrealized gain in the Statement of Operations. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to foreign currency transactions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U. S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Accumulated Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ------------------- ------------------------ --------------------- $ (301,769) $301,856 $ (87)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 26 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .60% of the amount invested. All purchase premiums are paid to and recorded by the Fund as paid-in capital. For the year ended February 29, 2000, the Fund received $450,002 in purchase premiums. There is no premium for cash redemptions or reinvested distributions. While no purchase premium is normally charged with respect to in-kind purchases of Fund shares, a purchase premium of up to .10% may be charged on certain in-kind purchases. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of .75% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceeded .54% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000, was $848. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 27 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, aggregated $101,716,751 and $3,529,195, respectively. At February 29, 2000, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation ---------------------------- -------------------------- ------------------------- ------------------------- $115,128,793 $13,788,481 $18,229,305 $4,440,824
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 48.52% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from July 29, 1998 Year Ended (commencement of operations) February 29, 2000 to February 28, 1999 -------------------------------------------- -------------------------------------------- Class III: Shares Amount Shares Amount -------------------- -------------------- -------------------- -------------------- Shares sold 8,828,580 $ 98,659,192 2,083,735 $ 20,337,787 Shares issued to shareholders in reinvestment of distributions 65,946 741,893 835 8,274 Shares repurchased - - (176,641) (1,715,182) -------------------- -------------------- -------------------- -------------------- Net increase 8,894,526 $ 99,401,085 1,907,929 $ 18,630,879 ==================== ==================== ==================== ====================
28 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: SHORT FORWARD CURRENCY CONTRACT
Settlement Units Net Unrealized Date Deliver/Receive of Currency Value Depreciation ---------------------- ------------------------ -------------------- ------------------ ------------------- 10/20/00 HKD 2,949,532 $ 378,679 $ (2,679) ===================
FORWARD CROSS CURRENCY CONTRACT
Settlement Net Unrealized Date Deliver/Units of Currency Receive/In Exchange For Depreciation ---------------- ---------------------------------- ---------------------------- ----------------- 4/13/00 JPY 56,398,518 DEM 826,837 $ (108,780) =================
Currency Abbreviations: DEM German Mark HKD Hong Kong Dollar JPY Japanese Yen 29 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) Federal Tax Information - (Unaudited) February 29, 2000 - -------------------------------------------------------------------------------- The Fund has elected to defer to March 1, 2000 post-October currency losses of $493,253. For the fiscal year ended February 29, 2000, all the Fund's distributions are from investment company taxable income. At February 29, 2000, the Fund had a capital loss carryforward available to offset future capital gains, if any, of the following amount:
YEAR OF EXPIRATION AMOUNT ------------------ ------ 2008 $323,163
30 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A Series of GMO Trust) PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham and Mr. Darnell have been portfolio managers at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. Mr. Berkley has been with GMO and involved in portfolio management for more than ten years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The GMO Tax-Managed International Equities Fund returned 8.7% for the fiscal year ended February 29, 2000, as compared to 25.5% for the MSCI EAFE benchmark before taxes. On an after-tax basis, the Fund returned 8.2% compared to the benchmark's 22.2% for the same period. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in international equity securities throughout the period. In international markets, the fiscal year was characterized by explosive performance of the technology and telecommunications sectors. This effect was particularly strong in the fourth quarter of 1999, during which period the MSCI EAFE Growth Index returned 25.6% versus 8.9% for MSCI EAFE Value. While this paralleled the run-up in the U.S. NASDAQ Index, the EAFE Index contains relatively few pure Internet and information technology stocks. The international rally focused more on the best available approximation, which is telecommunications stocks. Both fixed line and wireless companies performed very strongly in the markets, as did the related equipment providers. The optimism about these companies came despite the failure of many other growth stocks, such as pharmaceuticals and established software companies, to produce continued strong earnings growth. In contrast, many neglected stocks - typically smaller capitalization, value companies - had lackluster market performance for the fiscal year. Throughout the bull market of the late 1990's, growth stocks have enjoyed increasing "multiple expansion" to higher relative levels of price-to-book and price-to-earnings. As a result the spread, or discount, between the valuations of the cheaper stocks on such measures and the most expensive stocks has reached levels unprecedented in history. These wide gaps are considerably beyond what could possibly be justified by the relatively modest differences in consensus growth rate estimates. This is true even if no regression of the higher profitability of telecommunications stocks took place in the next 20 years, which would be contrary to the entire history of corporate competition. The fiscal year was marked by strong performance in the Asian markets. Japan rose by 42% in local currency, while Hong Kong and Singapore returned +66% and +59%, respectively. These markets benefited both from the dissipation of the crisis mentality and from the underlying recovery in the economic fundamentals of the region. The only two countries that had higher returns than all the Asian markets were Finland and Sweden (dominated by the returns of Nokia and Ericsson respectively). The major European markets showed mixed returns, with Germany and France leading the way, both with gains of 56% (+37% in U.S. dollars). The United Kingdom and Switzerland were the worst performing major markets, with slightly negative returns in local currency and worse in dollar terms. EFFECT OF COUNTRY ALLOCATION Country selection detracted from relative performance in the fiscal year. The Fund's underperfomance is primarily due to underweights in Finland, Sweden and Japan. The Fund's allocation to emerging markets countries added value during the period. The Fund was generally underweight in Europe. It suffered from being overweight in Austria, but benefited from underweights in the United Kingdom and Switzerland. EFFECT OF STOCK SELECTION The poor performance in the fiscal year was entirely a result of stock selection, and in particular the Fund's tilt towards value. Because of the opportunities represented by the wide dispersion in price-to-book ratios, the Fund is heavily concentrated in the cheaper stocks on price-to-book. Those groups underperformed EAFE by -14.5% and -9.3% respectively for the fiscal year. The Fund was further hurt by its emphasis on smaller capitalization stocks, which underperformed significantly even after accounting for their overlap with value. Small stocks within EAFE underperformed by -17%, and small value stocks underperformed by -30%. Value stocks did very poorly whether defined on the basis of book, earnings, sales or dividend yield, which shows that the Fund's underperformance is not a consequence of focussing on price-to-book as a valuation measure. The Fund's more sophisticated value models, which make further adjustments to credit companies for growth and financial quality, fared equally poorly. In this overheated environment, reasonable adjustments did not suffice to make the most expensive price-to-book stocks look attractive. Much of the size and value underperformance was driven by telecommunications and technology stocks. OUTLOOK Based on a careful analysis of current company fundamentals and valuation, GMO has decided to retain its substantial overweights in value stocks and small companies, in order to benefit from the inevitable rebound. While the growth oriented bull market of the last few years has been a difficult period for the Fund, it leaves us at a moment of great opportunity. For value investors it is always darkest before the dawn. Markets overshoot fair value, and it is difficult to call the turning points. Yet the greater the overshoot past fair value, the more certain is the eventual rebound, and greater is the reward to those that participate. Furthermore, globalization and monetary union have not eliminated the significance of country selection. This is apparent in the wide spread of returns during the last fiscal year and also in a wide spread in valuations between countries, even when adjusted for industry composition. To take advantage of these opportunities, the Fund remains underweight in Europe and particularly in favor of Asia ex-Japan. Despite the strong performance of Asia in 1999, those markets still are attractively valued relative to the rest of EAFE. Even within Europe there are attractive opportunities to favor cheaper markets such as Austria over more expensive ones such as the United Kingdom and Spain. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. - -------------------------------------------------------------------------------- COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND CLASS III SHARES AND THE MSCI EAFE INDEX AS OF FEBRUARY 29, 2000
- -------------------------------------------------------------------------------- Average Annual Total Return - -------------------------------------------------------------------------------- 1yr Since Inception - -------------------------------------------------------------------------------- 7/29/98 7.99% 3.34% - --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Date Tax Managed Int'l Equities Fund MSCI EAFE ---- ------------------------------- --------- 7/29/1998 9940 10000 9/30/1998 8648 8512 12/31/1998 10097 10270 3/31/1999 10057 10412 6/30/1999 11046 10677 9/30/1999 11076 11146 12/31/1999 11637 13039 2/29/2000 10536 12538
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 60 bp on the purchase. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of GMO Trust and the Shareholders of GMO Emerging Markets Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Emerging Markets Fund at February 29, 2000, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 29, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts April 18, 2000 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments (Showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS - 78.7% ARGENTINA - 0.0% 42,993 Nobelza Piccardo 91,159 --------------------- BRAZIL - 4.8% 4,400,000 Belgo Mineira (Registered) 323,230 13,100,000 Cesp-Cia Energetica Sao Paulo 56,264 4,018,000 Cia Saneamento Basico SAO PA * 398,507 1,716,000 Coelba ON 27,153 1,676,280,000 Companhia de Acos Especiais Itabira-Acesita * 1,089,416 212,248,500 Companhia Siderurgica Nacional SA 6,489,203 497,200,000 Electrobras 8,623,378 139,600 Embratel Participacoes SA ADR 3,350,400 144,894 Investimentos Itau SA 123,645 169,200 Souza Cruz (Registered) 1,018,355 277,300 Tele Centro Oeste Celular ADR 2,495,700 35,000 Tele Centro Sul Participacoes ADR 2,524,375 33,600 Tele Leste Celular Participacoes SA ADR 1,360,800 55,300 Tele Nordeste Celular Participacoes ADR 3,304,175 106,000 Tele Norte Leste Participacoes ADR 2,703,000 268,194,000 Telecomunicacoes Brasileiras SA 23,628,960 17,790 Telesp Celular Participacoes SA 206 --------------------- 57,516,767 --------------------- CHILE - 0.9% 9,655 Banco de Edward ADR 177,411 55,800 Banco Santander ADR 826,538 37,900 Banco Santiago ADR 758,000 12,500 Chilectra SA ADR 212,500 152,700 Chilquinta ADR 144A 1,557,540 30,800 Compania de Telefones de Chile ADR 616,000 36,000 Cristalerias de Chile SA ADR 756,000 14,148 Empresa Nacional de Electricidad SA ADR 168,008 20,581 Enersis SA ADR 401,330 79,663 Gener SA ADR 1,234,777 18,400 Laboratorio Chile SA ADR 439,300 26,000 Madeco SA ADR 349,375 101,100 Masisa SA ADR 1,529,138 55,490 Quinenco SA ADR 665,880 14,000 Sociedad Quimica y Minera de Chile ADR 412,125 128,200 Telex Chile ADR * 104,163 6,600 Vina Concha y Toro SA ADR 249,150 --------------------- 10,457,235 --------------------- CHINA - 5.2% 5,120,000 Beijing Datang Power Generation Co Ltd Class H 618,389 9,878,000 China Eastern Airlines * 951,907 624,832 China International Marine Containers Ltd Class B 381,348 1,760,000 China Merchants Holdings Co Ltd 1,091,124
See accompanying notes to the financial statements. 1 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------------------------- CHINA - CONTINUED 10,914,000 China Overseas Land & Investment Ltd * 1,430,370 1,511,000 China Resources Enterprise 1,951,168 1,086,895 China Southern Glass Co Ltd Class B * 153,619 4,638,000 China Telecom Ltd * 42,757,941 2,342,000 Citic Ka Wah Bank Ltd 722,208 1,567,000 Cosco Pacific Ltd 895,969 6,406,000 Guangdong Investment Ltd * 864,252 115,700 Guangshen Railway Co ADR 578,500 14,781,000 Guangshen Railway Co Class H 1,519,350 116,300 Huaneng Power International ADR 835,906 16,018,000 Jilin Chemical Industrial Co 967,320 35,168,000 Maanshan Iron & Steel * 1,536,352 9,926,000 Qingling Motor Co Ltd Class H 1,058,562 3,794,094 Shanghai Chlor-Alkali Chemical Class B * 409,762 597,000 Shanghai Industrial Holdings 1,123,767 5,854,684 Shanghai Lujiazui Finance & Trade Class B * 1,651,021 1,110,501 Shenzhen Seg Co Ltd Class B * 492,269 12,437 SIIC Medical Science and Technology (Group) Ltd * 2,940 3,892,000 Yizheng Chemical Fibre Co Class H * 615,095 4,970,000 Zhejiang Expressway Co 619,430 --------------------- 63,228,569 --------------------- COLOMBIA - 0.0% 24,300 Banco Ganadero SA ADR 314,381 --------------------- CZECH REPUBLIC - 0.7% 92,000 Ceska Sporitelna * 524,882 670,178 Ceske Energeticke Zavody AS * 2,230,994 38,283 Ceske Radiokomunikace * 2,339,554 31,100 Komercni Banka AS * 774,375 323,988 SP Vseobecny * 825,129 75,300 SPT Telecom AS * 1,578,613 430 Tabak AS 81,465 --------------------- 8,355,012 --------------------- EGYPT - 0.6% 12,000 Al Ahram Beverage Co * 219,761 20,000 Al Ahram Beverage Co GDR 144A * 362,000 98,000 Al Ahram Beverage Co GDR (Registered) * 1,773,800 3,754 Eastern Tobacco Co 84,917 2,000 Egypt Gas Co 72,063 15,800 Egyptian International Pharmaceuticals Industries Co 744,587 16,770 Miraco 215,363 83,685 MobiNil-Egyptian Mobile Services Co * 4,004,762 19,000 Oriental Weavers Co 338,197 --------------------- 7,815,450 --------------------- GREECE - 0.0% 8,940 Econ Viomihanies (a) * 5,879 ---------------------
2 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------------------------- HONG KONG - 0.1% 1,250,000 Founder Holdings Ltd * 1,003,816 --------------------- HUNGARY - 0.0% 28,151 Fotex (Registered) * 14,774 --------------------- INDIA - 8.9% 100 Amara Raja Batteries Ltd * 307 2,510 Aptech Ltd 131,799 190 Aptech Ltd (New Shares) 9,977 530 Arvind Mills Ltd * 210 225,000 Ashok Leyland Ltd 426,667 63,000 Atco Technologies Ltd 678,231 100 Bank of India * 41 299,600 Birla Corp Ltd 159,723 308,737 BSES Ltd 2,179,716 400 Ceat Ltd 614 7,350 Ceat Ltd * 11,275 1,300 Cipla Ltd 32,787 600 Cipla Ltd (New Shares) * 15,132 2,000 Cipla Ltd (New Shares) * 50,441 125,000 Citicorp Securities & Investments 1,389,980 8,200 Citicorp Securities & Investments 91,183 400 CMC Ltd 5,531 56,000 DSQ Software Ltd 2,100,742 206,600 Escorts Ltd 992,940 600 Eveready Industries Ltd * 995 125,000 Fujitsu ICIM * 2,327,954 591 Glaxo India Ltd 6,369 437,292 Global Tele-Systems Ltd 20,796,594 190,288 Global Tele-Systems Ltd (New Shares) * 9,049,656 51,165 Godfrey Phillips India 645,264 1,465 Great Eastern Shipping Co 601 2,990 HCL Infosytems Ltd 53,477 30,000 HCL Technologies Ltd * 1,432,027 353,000 Himachal Futuristic Communications * 14,086,004 28,300 Hughes Software Systems Ltd * 2,068,774 20 India Cements 35 400 ITC Ltd 6,780 100,300 Kale Consultants Ltd * 869,349 861,421 KEC International Ltd 725,896 83,400 Leading Edge Systems Ltd 3,685,769 175,000 Lupin Laboratories Ltd 1,604,890 80,000 Mahindra & Mahindra * 880,507 8,700 Mastek Ltd 810,926 8,700 Mastek Ltd * 810,926 291,800 McDowell & Co Ltd 1,371,641 100,000 Morepen Laboratories Ltd 2,258,592 475 NIIT Ltd 24,097 100 NIIT Ltd (New Shares) 5,064
See accompanying notes to the financial statements. 3 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------------------------- INDIA - CONTINUED 50,000 Nirma Ltd * 1,486,199 38,200 PSI Data Systems Ltd * 1,357,677 295,850 Raymond Ltd 468,082 36,529 Reliance Industries 259,239 6,400 Reliance Petroleum Ltd * 9,642 1,600 Sanghi Polyesters Ltd * 128 1,200 Satyam Computer Service 138,432 457,500 Shyam Telecom Ltd * 6,186,196 57,000 Silverline Technologies Ltd * 1,270,668 5,000 Software Solutions Integrated Ltd * 632,469 14,850 SSI Ltd 1,879,624 2 Sterlite Industries Ltd 33 32,400 Sun Pharmaceuticals Industries 1,966,529 175,100 Tata Elxsi Ltd * 760,645 427 Tata Iron & Steel 1,178 290,000 U TV of India (b) * 3,324,830 56,000 United Breweries Ltd 215,724 10 Videocon International Ltd 17 1,105 Videocon International Ltd * 1,898 38,500 Videsh Sanchar Nigam Ltd 1,900,580 436,700 Vikas WSP Ltd 10,094,080 10,100 VisualSoft Ltd * 1,948,843 145,200 Western Hatcheries Ltd 516,060 9,400 Western Hatcheries Ltd * 33,409 3,600 Wockhardt Life Sciences Ltd * 11,231 73,400 Wockhardt Ltd * 1,202,288 --------------------- 107,465,184 --------------------- INDONESIA - 5.0% 13,473,100 Astra International * 6,668,504 95,900,000 Bank Internasional Indonesia * 1,291,582 33,328,000 Barito Pacific Timber * 2,356,525 11,300,000 Citra Marga Nusaphala Persad * 1,179,461 1,875,000 Dynaplast * 284,091 12,752,000 Gajah Tunggal Tbk * 1,459,825 7,431,000 Gudang Garam 12,385,000 78,100 Gulf Resources Ltd ADR * 546,700 3,323,900 HM Sampoerna * 5,495,067 3,643,800 Indah Kiat Pulp & Paper * 1,006,032 9,451,000 Indorama Synthetics * 1,463,791 3,072,000 International Nickel * 3,061,657 15,777,500 Kalbe Farma * 2,071,793 23,282,000 Matahari Putra Prima Tbk * 3,135,623 25,051,250 PT Asuransi Lippo Life Tbk * 1,939,996 5,069,000 PT Indofood Sukses Makmur Tbk * 4,198,566 573,000 PT Indosat (Persero) Tbk 1,034,101 64,000,000 PT Lippo Bank Tbk * 1,723,906 17,058,500 PT Multipolar Corp Tbk * 2,527,185 3,072,500 PT Pabrik Kertas Tjiwi Kimia * 724,158
4 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------------------------- INDONESIA - CONTINUED 2,973,000 Ramayana Lestari 1,841,859 427,280 Telekomunikasi Indonesia 210,043 138,240 Telekomunikasi Indonesia Class B ADR 1,339,200 2,843,500 United Tractors * 2,489,259 --------------------- 60,433,924 --------------------- ISRAEL - 0.2% 440,000 Bank Leumi Le-Israel * 965,838 1,982 Clal Electronics Industries Ltd * 523,745 78,930 Clal Industries Ltd * 1,010,672 1 Machteshim Agan Industries * 2 --------------------- 2,500,257 --------------------- KOREA - 9.8% 76,083 Cheil Jedang Corp 4,903,568 49,383 Communication Network Interface Inc 903,743 243,520 Daelim Industrial Co Ltd 1,291,763 1,482,000 Daewoo Corp 537,192 234,000 Daewoo Electronics * 126,195 211,000 Dong-Ah Construction * 572,688 100,198 Dongbu Steel Co 276,383 40,680 Halla Climate Control Corp 1,186,839 126,420 Hankuk Glass 1,508,852 493,948 Hanwha Corp 1,965,128 74,039 Hite Brewery Co Ltd * 1,832,802 49,438 Hyundai Cement Co 236,022 256,734 Hyundai Electronics Industries * 4,062,875 274,148 Hyundai Engineering & Construction * 954,945 100,881 Hyundai Heavy Industries 2,809,422 230,629 Hyundai Industrial Development 1,386,500 6,819 Hyundai Motor Co 72,645 20,650 Keum Kang Ltd 949,337 458,517 Kookmin Bank 5,107,673 280,993 Kookmin Bank GDR (Registered) 3,175,221 18,460 Korea Chemical 1,150,583 6,640 Korea Data Systems 95,100 7,100 Korea Next Education Services Inc * 2,146,750 171,400 Korea Telecommunications ADR 7,455,900 271,815 Korean Air Lines 1,862,397 76,400 LG Ad Inc * 5,065,843 34,880 LG Home Shopping Inc * 4,409,706 69,324 LG Information & Communication 7,691,737 8,700 Lotte Confectionery Co 1,038,365 75,076 Pohang Iron & Steel (b) 7,733,736 3 Sam Yang 40 28,599 Samsung Display Devices 831,848 19,793 Samsung Electro Mechanics 1,200,419 60,230 Samsung Fire & Marine Insurance 1,711,949 143,033 Samsung Securities 4,375,316
See accompanying notes to the financial statements. 5 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------------------------- KOREA - CONTINUED 34,682 Serome Technology Inc * 4,384,673 263,000 Shinhan Bank 2,511,173 48,782 Shinsegae Department Store 2,005,440 3,820 SK Telecom 14,184,360 101,010 SK Telecom ADR 4,539,137 951,643 Ssangyong Cement * 1,901,427 126,770 Ssangyong Oil Refining 2,118,241 341,131 Tai Han Electric Wire 4,192,114 166,954 The Will-Bes & Co 2,044,296 1,760 Wooree Lighting Co Ltd * 42,323 --------------------- 118,552,666 --------------------- LEBANON - 0.3% 217,064 Banque Libanaise * 2,371,424 139,000 Solidere GDR (Registered) * 1,216,250 --------------------- 3,587,674 --------------------- MALAYSIA - 8.3% 803,000 Affin Holdings Berhad 828,358 1,547,000 Berjaya Sports Toto 3,928,566 52,600 British American Tobacco Berhad 387,579 974,000 Cement Industries of Malaysia Berhad 794,579 2,017,900 Cold Storage 1,550,597 298,000 Commerce Asset Holdings 933,211 769,000 Edaran Otomobil Berhad 3,237,895 605,000 Genting Berhad 2,674,737 53,700 Golden Hope Plantations Berhad 47,765 2,010,000 Highlands and Lowlands Berhad 1,295,921 574,000 Hong Leong Credit Berhad 1,238,632 2,069,000 Hong Leong Properties Berhad 865,713 1,117,000 Hume Industries-Malaysia Berhad 1,587,316 1,440,625 IGB Corp Berhad 640,699 1,328,000 IJM Corp Berhad Class A 1,488,758 2,262,800 IOI Corp Berhad 1,560,141 808,000 Malakoff Berhad 2,190,105 1,380,000 Malayan Banking Berhad 6,210,000 2,004,000 Malayan Cement Berhad 738,316 4,672,000 Malayan United Industries Berhad * 1,131,116 2,117,000 Malaysian International Shipping (Foreign Registered) 3,203,355 940,000 Malaysian Oxygen Berhad 2,943,684 281,000 Malaysian Pacific Industries 3,567,961 7,491,000 Metroplex Berhad 2,129,021 1,634,000 Multi Purpose Holdings * 855,700 290,000 New Straits Times 1,221,053 1,814,600 Nylex Berhad 1,408,703 1,630,900 Oriental Holdings Berhad 3,841,199 600,000 Public Bank Berhad (Alien Market) 813,158 1,591,000 Renong Berhad * 1,314,668 1,947,600 Resorts World Berhad 7,072,863 624,000 RHB Capital Berhad 993,474
6 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------------------------- MALAYSIA - CONTINUED 645,000 Sarawak Enterprises Corp 470,171 109,620 Silverstone (b) * 1,298 2,386,000 Sunway Holdings Incorporated Berhad * 1,663,921 14,130,000 Tan Chong International Ltd 2,142,340 1,732,700 Tanjong 4,354,549 9,096,000 Technology Resources Industries 13,045,579 1,355,000 Telekom Malaysia Berhad 5,740,921 600,000 Tenaga Nasional Berhad 1,989,474 383,000 UMW Holdings Berhad 806,316 415,000 Unisem Berhad 3,931,579 809,000 United Engineers * 2,235,395 3,491,700 Westmont Industries Berhad (a) * 9,189 286,000 YTL Corp 526,842 --------------------- 99,612,417 --------------------- MEXICO - 5.9% 430,100 Alfa SA Class A * 1,515,083 2,666,415 Altos Hornos de Mexico * 717,268 263,500 Carso Global Telecom Class A * 3,290,937 98,900 Cemex SA de CV ADR (Participating Certificates) * 2,113,988 631,000 Cemex SA de CV CPO 2,727,957 2,251,915 Controladora Comercial Mexicana SA de CV Classes B and C 2,163,454 280,000 Corporacion GEO SA * 690,436 1,601,680 Cydsa SA Class A 1,371,208 203,400 Empresas ICA Sociedad Controladora ADR 508,500 228,000 Empresas La Moderna SA de CV Class A * 1,338,599 879,600 Grupo Carso SA de CV Class A * 3,427,135 1,500,000 Grupo Casa Autrey * 1,200,897 593,705 Grupo Financiero Banamex Acciva Class O * 2,531,865 7,189,795 Grupo Financiero Bancomer SA * 3,545,778 640,000 Grupo Financiero Inbursa SA * 2,958,155 11,275,700 Grupo Financiero Probursa SA de CV Class B * 1,420,295 8,232,755 Grupo Financiero Serfin SA de CV Class B (a) * 8,788 3,797,320 Grupo Gigante SA Class B * 1,661,936 1,350,000 Grupo Industrial Maseca SA 821,413 449,418 Grupo Mexico Class B 2,230,779 80,200 Grupo Mexico Desarollo Class B ADR (b) * 12,531 314,700 Grupo Radio Centro SA ADR 2,733,956 6,255,000 Grupo Situr SA de CV Class B * 120,186 8,300 Grupo Televisa SA GDR * 637,544 670,000 Grupo Televisa SA (Participating Certificates) * 2,574,722 1,997,500 Grupo Tribasa SA ADR * 998,750 1,000,000 Herdez Class BCP * 309,564 500,000 Hylsamex SA * 1,136,849 10,000 Ispat International NV Class A (Registered) 125,625 535,000 Kimberly Clark Class A 1,664,736 303,000 Organizacion Soriana SA de CV Class B * 1,243,633
See accompanying notes to the financial statements. 7 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------------------------- MEXICO - CONTINUED 138,000 Pepsi-Gemex SA * 690,000 269,200 Telefonos de Mexico Class L ADR 17,699,900 47,000 Tubos de Acero de Mexico SA ADR 649,188 493,800 Vitro SA ADR 2,098,650 930,000 Wal-Mart de Mexico SA de CV * 2,223,740 --------------------- 71,164,045 --------------------- PAKISTAN - 1.0% 1,002,000 Fauji Fertilizer (b) 1,155,597 157,166 Hub Power Co Ltd GDR * 1,925,284 500 Karachi Electric Supply (b) * 113 106,880 Lever Brothers Pakistan Ltd (b) * 2,054,394 598,608 Pakistan State Oil (b) 2,690,247 6,174,600 Pakistan Telecom Corp Ltd Class A (b) 3,628,373 6,600 Pakistan Telecom Corp Ltd GDR * 349,800 341 Sui Southern Gas Pipelines Ltd (b) * 145 --------------------- 11,803,953 --------------------- PERU - 0.0% 127,604 Cervecerias 51,531 730 Milpo Minera Class T * 261 --------------------- 51,792 --------------------- PHILIPPINES - 1.1% 19,912,000 Aboitiz Equity Ventures Inc 952,355 1,459,000 Alsons Cement * 49,844 7,182,320 Ayala Corp 1,542,323 2,862,000 Digital Telecommunications * 69,839 3,544,297 DMCI Holdings Inc * 74,380 13,139,500 EEI Corp * 192,379 23,602,000 Empire East Land Holding Inc * 201,579 299,890 Equitable Banking Corp 409,806 413,790 Far East Bank & Trust 641,183 5,623,100 Filinvest Land * 356,761 1,814,000 International Container Terminal * 78,793 1,909,543 Ionics Circuits Inc * 605,760 8,925,000 JG Summit Holdings Inc Class B 653,368 807,500 La Tondena Distillers Inc 403,947 9,719,000 Metro Pacific Corp * 187,360 8,723,000 Petron Corp 519,378 200,470 Philippine Long Distance Telephone 4,353,790 59,000 Philippine National Bank * 95,022 823,000 Robinsons Land Corp Class B 54,224 198,440 San Miguel Corp Class B 232,433 371,200 Security Bank Corp * 271,742 3,505,000 SM Prime Holdings 470,412 2,998,000 Universal Robina Corp 490,156 --------------------- 12,906,834 ---------------------
8 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------------------------- POLAND - 0.3% 92,650 Agora SA GDR 144A * 3,208,006 234,502 Okocimskie Zaklady Piwowarskie SA * 929,000 --------------------- 4,137,006 --------------------- RUSSIA - 4.0% 2,649,789 Chelabinsky Tube Work * 26,498 17,100 Dalmoreproduct * 1,368 272,800 Electrocila * 763,840 29,221 Elisb (b) * 10,227 472,700 Irkutskelectrosviaz * 177,263 3,368,100 Irkutskenergo ADR 11,025,139 89,030 Kirovsky Plant 151,351 52,979 Lukoil Holding Co 543,035 221,325 Lukoil Holding Co ADR 9,240,319 2,290,387 Norilsk Nickel (Registered) * 19,559,905 135,000 Russia Petroleum * 108,000 10,000 Seversky Tube Works ADR * 58,728 785,700 St Petersburg Telephone * 644,274 500,000 Sun Interbrew Ltd GDR * 2,250,000 37,000 Trade House GUM ADR 50,320 1,014,240 Uralmash Zavody * 1,277,942 450,000 Uralmash Zavody ADR 144A * 567,000 1,418,180 Uralmash Zavody ADR (Registered) * 1,786,907 --------------------- 48,242,116 --------------------- SOUTH AFRICA - 7.6% 657,100 AECI Ltd 1,532,788 857,637 Amalgamated Bank of South Africa 3,311,757 171,718 Anglo American Corp Plc 7,697,227 54,545 Anglo Gold Ltd 2,828,393 2,148,700 Anglovaal Industries Inc 2,048,897 240,600 Anglovaal Ltd 1,715,944 895,700 Barlow Ltd 6,564,542 275,900 Comparex Holding Ltd 1,924,216 6,929,404 Consolidated African Mines * 753,588 243,380 De Beers Centenary Link Units 5,331,981 2,616,200 Del Monte Royal Foods Ltd 1,999,869 401,327 Dimension Data Holdings * 3,731,980 341,500 Genbel Securities Ltd 2,206,803 196 Harmony Gold Mining Co Ltd 1,220 504,016 Illovo Sugar Ltd 460,746 938,679 Iscor Ltd 2,626,058 246,008 Liberty International Plc 1,593,602 527,640 Liberty Life Association of Africa Ltd 5,139,432 2,135,615 Mawenzi Resources Ltd * 104,345 2,669,840 Murray & Roberts Holdings Ltd 1,767,354 917,124 Nampak Ltd 2,370,614 2,793,200 Premier Group Ltd 308,169 164,000 Randgold Resources Ltd GDR 144A * 574,000
See accompanying notes to the financial statements. 9 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------------------------- SOUTH AFRICA - CONTINUED 309,500 Randgold & Exploration Co * 290,246 842,470 Rembrandt Group Ltd 7,303,080 5,572,000 Safmarine & Rennies Holdings 2,590,729 14,400 Sage Group Ltd 46,527 268,768 Sappi Ltd 2,223,954 1,744,910 Sasol Ltd 11,165,752 895,306 Standard Bank Investment Corp 3,485,438 16,200,260 Sun International Ltd 3,319,359 457,051 Tiger Brands Ltd 4,740,012 25,900 Western Areas Gold Mining Co Ltd 84,909 --------------------- 91,843,531 --------------------- SRI LANKA - 0.1% 4,590,170 Blue Diamonds Jewelry Ltd * 109,312 333,600 Lanka Walltile Ltd 31,778 404,200 Lion Brewery Ceylon Ltd 104,508 311,597 Millenium Information Technology (b) (c) * 685,513 --------------------- 931,111 --------------------- TAIWAN - 2.5% 123,000 Acer Inc * 334,217 243,000 Advanced Semiconductor Engineering Inc * 810,527 2,467,290 Ambassador Hotel * 1,148,137 112,000 Asustek Computer Inc 1,395,900 4,703,400 Chia Hsin Food & Synthetic * 2,073,904 978,550 China Steel Corp 757,875 1,372,769 China Trust Commercial Bank * 1,474,174 2,588,330 Chung Shing Textile * 564,328 1,091,130 First Bank * 1,587,163 3,483,680 Formosa Taffeta Co 2,834,103 1,452,650 Great Wall Enterprise Co 569,620 93,000 Hon Hai Precision Industry Co Ltd * 865,539 2,569,000 Hualon Co Ltd * 727,312 173,700 International Commercial Bank Of China 195,010 1,361,350 Megamedia Corp * 770,826 5,916,564 Pacific Construction * 2,445,179 1,116,000 Right Way Industrial Co Ltd * 319,583 468,608 Taipei Business Bank * 539,822 1,597,000 Taiwan Fluorescent Lamp Co * 405,356 2,019,000 Taiwan Pulp and Paper Co * 992,089 815,228 Taiwan Semiconductor * 5,332,276 729,000 United Microelectronics * 2,668,809 637,000 Wan Yu Paper (a) * 207 2,374,000 Yieh Loong Co * 826,612 --------------------- 29,638,568 --------------------- THAILAND - 6.4% 95,200 ABN Amro Asia Securities Pcl (Foreign Registered) 101,157 593,900 Advanced Info Service Public Co Ltd (Foreign Registered) * 9,224,421 2,197,000 Ban Pu Coal Public Co Ltd (Foreign Registered) 1,138,417 6,842,700 Bangchak Petroleum Public Co Ltd (Foreign Registered) * 1,202,836
10 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------------------------- THAILAND - CONTINUED 3,778,500 Bangkok Bank Pcl (Foreign Registered) * 6,096,753 90,800 Bangkok Insurance (Foreign Registered) 283,489 4,257,600 Bangkok Rubber Public Co Ltd (Foreign Registered) * 491,498 5,595,000 Bank of Ayudhya Pcl (Foreign Registered) * 1,438,567 275,900 BEC World Public Co Ltd (Foreign Registered) 2,070,245 1,641,277 CP Feedmill Public Co Ltd (Foreign Registered) * 5,942,443 829,760 Delta Electronics Public Co Ltd (Foreign Registered) 9,535,219 3,132,760 Electricity Generating Public Co Ltd (Foreign Registered) 2,815,087 7,668,959 Industrial Finance Corp of Thailand (Foreign Registered) * 2,162,962 154,510 Italian-Thai Development Public Co Ltd (Foreign Registered) * 78,035 881,900 Jasmine International Public Co (Foreign Registered) * 480,111 631,000 Krung Thai Bank Public Co Ltd (Foreign Registered) * 219,356 151,100 Lanna Lignite Pcl (Foreign Registered) 80,277 303,600 National Petrochemical (Foreign Registered) (b) * 321,084 203,519 PTT Exploration and Production Public Co Ltd (Foreign Registered) * 987,827 727,700 Saha Pathana International Holdings Pcl (Foreign Registered) 744,597 2,230,500 Saha Union Public Co Ltd (Foreign Registered) 687,613 1,142,500 Securities One Ltd (Foreign Registered) * 110,908 589,792 Shinawatra Computer Public Co Ltd (Foreign Registered) * 4,673,152 67,087 Siam Cement Pcl (Foreign Registered) * 1,210,963 4,574,300 Siam Commercial Bank Pcl (Foreign Registered) * 3,660,400 399,000 Siam Pulp & Paper (Foreign Registered) * 738,017 201,512 Singer Pcl (Foreign Registered) 163,895 3,108,050 Star Block Co Ltd (Foreign Registered) (b) * 8,154 6,351,413 Telecomasia Corp Public Co Ltd (Foreign Registered) * 8,831,822 961,500 Thai Airways International (Foreign Registered) * 908,146 4,004,600 Thai Farmers Bank Pcl (Foreign Registered) * 3,782,385 1,540,850 Thai German Ceramics Industry (Foreign Registered) * 351,709 5,397,880 Thai Petrochemical (Foreign Registered) * 1,416,209 105,200 Thai Plastic & Chemical (Foreign Registered) 278,767 3,068,400 Thai Telephone & Telecommunications (Foreign Registered) * 825,163 1,878,378 United Broadcasting Pcl (Foreign Registered) * 1,650,942 1,810,400 United Communication Industries (Foreign Registered) * 2,268,047 --------------------- 76,980,673 --------------------- TURKEY - 3.2% 19,411,000 Alarko Gayrimenkul Yatirim * 607,860 7,123,000 Anadolu Isuzu Otomotiv Sanay 514,274 10,709,000 Celik Halat ve Tel Sanayii AS 246,858 245,000,000 Dardanel Onentas Gida * 820,503 186,302,000 Doktas Dokumculuk Ticaret * 2,917,046 62,823,000 Eczacibasi Ilac Sanayi * 1,639,431 24,175,000 Eczacibasi Yapi * 946,307 67,816,000 Eczacibasi Yatirim Holding * 1,144,425 81,649,000 Eregli Demir VE Celik Fabrik * 3,515,680 79,143,000 Ford Otomotive Sanayii AS * 3,786,417 87,520,000 Gima * 2,093,598
See accompanying notes to the financial statements. 11 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------------------------- TURKEY - CONTINUED 345,450,000 Global Menkul Degerler * 3,425,652 68,613,000 Goltas Cimento 1,880,054 342,000,000 Izmir Demir Celik Sanayi * 2,260,960 14,453,000 KOC Holding AS 2,765,884 48,680,000 Mardin Cimento Sanayii 1,333,873 96,150,000 Medya Holding * 1,589,118 31,779,000 Sabanci Holding 1,465,107 56,314,000 Sarkuysan Elektrolitik Bakir 1,836,965 65,530,000 TAT Konserve * 1,311,056 179,677,000 Tofas Turk Otomobil Fabrik * 2,250,651 --------------------- 38,351,719 --------------------- VENEZUELA - 1.8% 2,402,565 Banco Provincial 1,668,826 160,606 Ceramica Carabobo Class B ADR 240,909 395,100 Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR 13,161,769 10,243,115 Electricidad de Caracas 2,969,691 154,800 Electricidad de Caracas ADR 2,205,900 778 International Briquettes Holding 2,237 40,181 Mantex SA Class A ADR * 286,491 160,000 Manufacturas de Papel CA ADR 108,800 125,000 Mercantil Servicios Financieros ADR 265,625 164,766 Siderurgica Venezolana (Sivensa) Class A ADR (Registered) * 247,149 23 Siderurgica Venezolana (Sivensa) Class B * - 723,926 Venepal SA Class B GDR 144A * 7,239 1,107,354 Venezolana de Cementes 334,422 292,673 Venezolana de Cementes Tipo II 88,387 --------------------- 21,587,445 --------------------- TOTAL COMMON STOCKS (Cost $926,131,310) 948,593,957 --------------------- PREFERRED STOCKS - 10.6% BRAZIL - 8.3% 22,920,000 Alpargatas de Sao Paolo 1,366,522 473,615,231 Banco Bradesco SA 3,401,893 30,753,775 Banco Bradesco SA * 220,899 67,516,200 Banco Estado Sao Paulo * 2,709,042 148,940,000 Banco Nacional (a) * 842 33,080,000 Belgo Mineira (Registered) 2,804,182 431,325,003 Bombril SA 3,168,819 5,108,000 Brahma PN 3,146,493 47,500,000 Caemi Mineracao e Metalurgica SA 4,697,655 60,942,827 Cemig 1,002,569 323,800,000 Cia Energetica de Sao Paolo SA (Registered) 2,177,576 34,000,000 Cia Energetica Perna Class A 157,559
12 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------------------------- BRAZIL - CONTINUED 1,123,059,000 Companhia de Acos Especiais Itabira-Acesita * 748,918 167,200,000 Companhia de Transmissao de Energia Eletrica Paulista * 859,859 13,889,000 Copene-Petroquimica do Nordeste SA Class A 4,772,259 227,248,860 Electrobras Class B (Registered) 4,154,564 162,100,000 Elektro 425,976 594,000,000 Fertilizantes Fosfatados 2,232,326 659,062,710 Gerasul 770,986 840,000 Globo Cabo SA * 1,628,257 1,361,000 Industrias Klabin de Papel e Celulose SA 1,269,087 6,931,459 Investimentos Itau SA 6,424,184 165,836 Investimentos Itau SA * 153,699 559,080,000 Iparanga Brasil de Petroleo 7,263,775 55,850,000 Itaubanco SA (Registered) 4,434,544 379,350,328 Lojas Americanas (Registered) 1,886,568 42,420,000 Mesbla (Registered) (b) * 4,075 335,746,000 Olvebra (b) * 64,512 199,400,000 Petrobras Distribuidora SA 2,704,493 25,796,000 Petroleo Brasileiro SA (Petrobras) 6,705,940 980,000 Sadia Frigobras SA (Registered) 775,360 353,450,328 Sao Carlos Empreendimentos e Participacoes * 802,978 415,600,000 Siderurgica de Tubarao * 6,435,400 220,000 Suzano (Registered) * 522,181 39,500 Telecomunicacoes Brasileiras SA ADR 5,816,375 49,522,000 Telecomunicacoes Brasileiras SA Receipts 7,262,480 56,881,650 Telecomunicacoes de Sao Paulo SA 1,928,093 2,830 Telesp Celular Participacoes SA 61 6,520,152 Unipar 4,200,607 499,000 Varig (Registered) * 1,215,422 13,100,000 Votorantim Celulose e Papel SA 451,522 --------------------- 100,768,552 --------------------- KOREA - 1.9% 125,240 Dongbu Steel Co 210,375 236,263 Samsung Electronics (Non Voting) 21,514,439 34,541 Shinsegae Department Store * 1,190,958 --------------------- 22,915,772 --------------------- RUSSIA - 0.3% 100,800 Krasny Oktyabr 144A 75,600 129,200 Lukoil Holding Co ADR 1,485,800 30 Rostelecom 28 25,000,000 Unified Energy Systems 1,500,000 --------------------- 3,061,428 --------------------- SRI LANKA - 0.1% 11,209,546 Millenium Information Technology (b) (c) * 1,564,516 --------------------- TOTAL PREFERRED STOCKS (Cost $104,914,789) 128,310,268 ---------------------
See accompanying notes to the financial statements. 13 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
Shares/ Par Value ($) Description Value ($) - ----------------------------------------------------------------------------------------------------------------------------------- INVESTMENT FUNDS - 3.0% BRAZIL - 0.0% 21,400 Brazil Fund Inc 386,538 --------------------- CHILE - 0.2% 22,000 Chile Fund Inc 250,250 241,900 Five Arrows Chile Investment Trust Ltd 672,482 474,600 Five Arrows Chile Investment Trust Ltd Convertible Units 1,340,745 --------------------- 2,263,477 --------------------- INDIA - 0.0% 425,000 TDA India Technology Fund II LP (b) (c) * 425,000 10,400 UTI Masterplus 1991 6,176 100 UTI Masterplus 1991 Unit 59 --------------------- 431,235 --------------------- POLAND - 1.8% 6,936,111 CHP Investors (b) (c) * 7,377,941 4,102,132 OBP Investors (b) (c) 7,526,181 5,500,000 Polimex Investment Fund (b) (c) 5,500,000 1,625,202 Templeton Emerging European Fund (b) (c) 1,297,723 --------------------- 21,701,845 --------------------- ROMANIA - 0.1% 3,600 Romanian Investment Fund (b) (c) * 1,260,000 --------------------- RUSSIA - 0.7% 450,000 Kazakhstan Investment Fund (b) (c) 283,500 10,000,000 New Century Holdings LP (b) (c) * 6,796,000 16,667 Societe Generale Thalmann Ukraine Fund (b) (c) * 633,346 --------------------- 7,712,846 --------------------- THAILAND - 0.1% 1,500,000 Ruam Pattana Fund (Registered) * 192,837 1,859,000 Ruang Khao Fund (Foreign Registered) * 273,131 70 Thailand International Fund IDR 516,600 --------------------- 982,568 --------------------- UNITED STATES - 0.1% 71,400 Morgan Stanley Emerging Markets Fund 1,178,100 170 SPG Infinity Technology Fund (b) (c) * 255,000 --------------------- 1,433,100 --------------------- TOTAL INVESTMENT FUNDS (Cost $45,974,469) 36,171,609 --------------------- DEBT OBLIGATIONS - 2.5% U.S. GOVERNMENT - 2.5% $ 19,545,584 U.S. Treasury Inflation Indexed Note, 3.375% due 1/15/07 (d) 18,488,911 $ 12,519,884 U.S. Treasury Inflation Indexed Note, 3.875% due 1/15/09 (d) 12,120,813 --------------------- 30,609,724 --------------------- TOTAL DEBT OBLIGATIONS (Cost $31,196,946) 30,609,724 ---------------------
14 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
Shares/ Par Value ($) Description Value ($) - ----------------------------------------------------------------------------------------------------------------------------------- EQUITY LINKED SECURITIES - 1.5% CHILE - 1.4% $ 12,779,671 Citibank-Nassau Chilean Equity Time Deposit, 3.50% due 4/03/00 (c) (e) * 13,887,668 $ 3,389,966 Citibank-Nassau Chilean Equity Time Deposit, 3.50% due 4/27/00 (c) (e) * 3,548,277 --------------------- 17,435,945 --------------------- RUSSIA - 0.1% 32,787 Renaissance Sberbank Note (c) (f) * 1,521,632 --------------------- TOTAL EQUITY LINKED SECURITIES (Cost $28,360,929) 18,957,577 --------------------- FULLY PAID SWAPS - 0.8% INDIA - 0.8% 126,000 BSES Swap (g) 875,173 74,150 HCL Industries Swap (g) 3,512,948 11,000 Leading Edge Systems Swap (g) 480,056 150,000 Shyam Telecom Swap (g) 2,002,908 180,453 Sterlite Industries Swap (g) 2,984,035 --------------------- 9,855,120 --------------------- TOTAL FULLY PAID SWAPS (Cost $7,077,696) 9,855,120 --------------------- CONVERTIBLE SECURITIES - 0.7% INDONESIA - 0.4% $ 26,000,000 APP Finance (VI), 0.00% due 11/18/12 4,680,000 --------------------- KOREA - 0.0% $ 500,000 Daewoo Corp, 0.00% due 12/31/07 135,000 --------------------- POLAND - 0.0% DEM 25,000 Elektrim SA, 2.00% due 5/30/04 19,690 --------------------- SOUTH AFRICA - 0.1% $ 1,100,000 Randgold Finance, 7.00% due 10/03/01 760,320 --------------------- THAILAND - 0.2% $ 5,030,000 Bangkok Bank Public Co, 3.25% due 3/03/04 2,653,325 $ 358,000 Bangkok Land Cayman Island, 4.50% due 10/13/03 35,800 $ 1,814,000 MDX Public Co Ltd, 4.75% due 9/17/03 163,260 $ 630,000 Somprasong Land Co, 3.88% due 1/21/04 6,300 --------------------- 2,858,685 --------------------- TOTAL CONVERTIBLE SECURITIES (Cost $13,231,651) 8,453,695 --------------------- RIGHTS & WARRANTS - 0.1% BRAZIL - 0.0% 84,234,574 Mesbla Preferred Rights 12/31/25 (b) * - 14,029,849 Tele Leste Celular Participacoes SA Preferred Rights 3/23/00 * - 75,980,803 Tele Leste Celular Participacoes SA Rights 3/23/00 * - --------------------- - ---------------------
See accompanying notes to the financial statements. 15 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000
Shares/ Par Value ($) Description Value ($) - ----------------------------------------------------------------------------------------------------------------------------------- INDONESIA - 0.0% 226,076 Indah Kiat Pulp & Paper Warrants 4/13/01 * 30,448 2,558,775 PT Multipolar Corp Tbk Warrants 12/25/49 * - --------------------- 30,448 --------------------- MALAYSIA - 0.0% 288,125 IGB Corp Berhad Warrants 12/29/04 * 49,285 43,600 UMW Holdings Berhad Warrants 1/26/05 * 43,141 247,200 YTL Corp Berhad Warrants 6/26/09 * 188,653 --------------------- 281,079 --------------------- MEXICO - 0.0% 38,886 Grupo Mexico Class B Warrants 8/09/01 * 190,943 --------------------- PHILIPPINES - 0.1% 2,523,700 Jolliebee FDS Warrants 3/24/03 * 692,817 --------------------- THAILAND - 0.0% 1,098,500 Banpu Public Co Warrants 1/14/03 * - 550,000 Siam Commercial Bank Ltd Warrants 5/10/02 * 134,199 --------------------- 134,199 --------------------- TURKEY - 0.0% 245,000,000 Dardanel Onentas Gida Rights 3/08/00 * 251,479 --------------------- TOTAL RIGHTS & WARRANTS (Cost $1,208,531) 1,580,965 --------------------- SHORT-TERM INVESTMENTS - 2.0% CASH EQUIVALENTS - 2.0% $ 7,200,000 Royal Bank of Canada Time Deposit, 5.81% due 3/01/00 7,200,000 16,537,900 The Boston Global Investment Trust (h) 16,537,900 --------------------- 23,737,900 --------------------- TOTAL SHORT-TERM INVESTMENTS (Cost $23,737,900) 23,737,900 --------------------- TOTAL INVESTMENTS - 99.9% (Cost $1,181,834,221) 1,206,270,815 Other Assets and Liabilities (net) - 0.1% 1,134,200 --------------------- TOTAL NET ASSETS - 100.0% $ 1,207,405,015 --------------------- ---------------------
16 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000 - ------------------------------------------------------------------------------- NOTES TO THE SCHEDULE OF INVESTMENTS: ADR American Depositary Receipt GDR Global Depository Receipt IDR International Depository Receipt DEM German Mark (a) Bankrupt issuer. (b) Valued by management (Note 1). (c) Security is restricted as to public resale. The aggregate market value of restricted securities is $52,562,297 or 4.35% of net assets. (d) Security, or a portion thereof, has been segregated to cover margin requirements on open swap contracts (Note 6). (e) A derivative security whose price is linked to the return on a basket of Chilean asset investments. (f) A derivative security whose price is linked to the return on a basket of Russian securities. (g) A derivative security whose price is linked to the return on the underlying security. (h) Represents investment of security lending collateral (Note 1). 144A Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. * Non-income producing security. See accompanying notes to the financial statements. 17 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Schedule of Investments - continued (Showing percentage of total net assets) February 29, 2000 - ------------------------------------------------------------------------------- At February 29, 2000, industry sector diversification of the Fund's equity investments was as follows:
Industry Sector (Unaudited) Telecommunications 21.8 % Banking 6.4 Electronic Equipment 6.0 Utilities 5.7 Metals and Mining 5.6 Conglomerates 5.5 Consumer Goods 5.4 Financial Services 4.4 Energy Services 4.4 Construction 3.0 Food and Beverage 2.8 Communications 2.7 Computers 2.6 Paper and Allied Products 2.5 Automotive 2.0 Services 1.4 Retail Trade 1.3 Chemicals 1.3 Real Estate 1.3 Machinery 1.1 Transportation 1.1 Textiles 0.9 Insurance 0.8 Health Care 0.7 Miscellaneous 9.3 ------------- 100.0 % ------------- -------------
18 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A Series of GMO Trust)
Statement of Assets and Liabilities - February 29, 2000 - ---------------------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $1,181,834,221) (Note 1) $ 1,206,270,815 Foreign currency, at value (cost $21,322,683) (Note 1) 21,303,896 Cash 64,536 Receivable for investments sold 21,168,871 Receivable for open swap contracts (Notes 1 and 6) 3,821,373 Foreign withholding taxes receivable 1,309,655 Dividends and interest receivable 5,363,771 Receivable for expenses waived or borne by Manager (Note 2) 37,287 ----------------- Total assets 1,259,340,204 ----------------- LIABILITIES: Payable for investments purchased 21,272,153 Payable upon return of securities loaned (Note 1) 16,537,900 Accrued capital gain and repatriation taxes payable (Note 1) 12,713,070 Payable to affiliate for (Note 2): Management fee 818,130 Shareholder service fee 133,285 Accrued expenses 460,651 ----------------- Total liabilities 51,935,189 ----------------- NET ASSETS $ 1,207,405,015 ----------------- ----------------- NET ASSETS CONSIST OF: Paid-in capital $ 1,389,345,769 Distributions in excess of net investment income (2,330,282) Accumulated net realized loss (202,505,234) Net unrealized appreciation 22,894,762 ----------------- $ 1,207,405,015 ----------------- ----------------- NET ASSETS ATTRIBUTABLE TO: Class III Shares $ 727,197,185 ----------------- ----------------- Class IV Shares $ 480,207,830 ----------------- ----------------- SHARES OUTSTANDING: Class III 65,146,773 ----------------- ----------------- Class IV 43,047,210 ----------------- ----------------- NET ASSET VALUE PER SHARE: Class III $ 11.16 ----------------- ----------------- Class IV $ 11.16 ----------------- -----------------
See accompanying notes to the financial statements. 19 GMO EMERGING MARKETS FUND (A Series of GMO Trust)
Statement of Operations - Year Ended February 29, 2000 - ---------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of foreign tax expense of $2,426,146) $ 23,435,371 Interest (including security lending income of $138,409) 4,492,716 ----------------- Total income 27,928,087 ----------------- EXPENSES: Management fee (Note 2) 8,754,687 Custodian fees 2,206,847 Legal fees 126,197 Audit fees 108,716 Transfer agent fees 54,459 Trustees fees (Note 2) 11,844 Registration fee 2,645 Miscellaneous 141,741 Fees waived or borne by Manager (Note 2) (296,467) ----------------- 11,110,669 Shareholder service fee (Note 2) Class III 1,088,963 Class IV 372,593 ----------------- Net expenses 12,572,225 ----------------- Net investment income 15,355,862 ----------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 98,954,583 Closed swap contracts 41,914,827 Foreign currency, forward contracts and foreign currency related transactions (4,369,053) ----------------- Net realized gain 136,500,357 ----------------- Change in net unrealized appreciation (depreciation) on: Investments (Note 1) 416,047,861 Open swap contracts 3,291,062 Foreign currency, forward contracts and foreign currency related transactions (222,877) ----------------- Net unrealized gain 419,116,046 ----------------- Net realized and unrealized gain 555,616,403 ----------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 570,972,265 ----------------- -----------------
20 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A Series of GMO Trust)
Statement of Changes in Net Assets - ----------------------------------------------------------------------------------------------------- Year Ended Year Ended February 29, 2000 February 28, 1999 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 15,355,862 $ 31,085,801 Net realized gain (loss) 136,500,357 (323,752,478) Change in net unrealized appreciation,(depreciation) 419,116,046 (201,053,937) ----------------- ----------------- Net increase (decrease) in net assets resulting from operations 570,972,265 (493,720,614) ----------------- ----------------- Distributions to shareholders from: Net investment income Class III (1,880,001) (16,087,702) Class IV (886,390) (9,786,346) ----------------- ----------------- Total distributions from net investment income (2,766,391) (25,874,048) ----------------- ----------------- In excess of net investment income Class III (1,583,628) - Class IV (746,654) - ----------------- ----------------- Total distributions in excess of net investment income (2,330,282) - ----------------- ----------------- Net realized gains Class III - (10,825,261) Class IV - (8,023,682) ----------------- ----------------- Total distributions from net realized gains - (18,848,943) ----------------- ----------------- In excess of net realized gains Class III - (49,311) Class IV - (36,550) ----------------- ----------------- Total distributions in excess of net realized gains - (85,861) ----------------- ----------------- (5,096,673) (44,808,852) ----------------- ----------------- Net share transactions: (Note 5) Class III (183,418,042) (77,844,893) Class IV 39,019,272 (183,333,072) ----------------- ----------------- Decrease in net assets resulting from net share transactions (144,398,770) (261,177,965) ----------------- ----------------- Total increase (decrease) in net assets 421,476,822 (799,707,431) NET ASSETS: Beginning of period 785,928,193 1,585,635,624 ----------------- ----------------- End of period (including distributions in excess of net investment income of $2,330,282 and $3,684,069, respectively) $ 1,207,405,015 $ 785,928,193 ----------------- ----------------- ----------------- -----------------
See accompanying notes to the financial statements. 21 GMO EMERGING MARKETS FUND (A Series of GMO Trust)
Financial Highlights (For a Class III share outstanding throughout each period) - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended February 28/29, ------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 6.31 $ 9.56 $ 12.49 $ 10.54 $ 9.52 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income 0.13 + 0.25 0.16 + 0.13 0.10 Net realized and unrealized gain (loss) 4.77 (3.19) (1.76) 1.96 1.06 ---------- ---------- ---------- ---------- ---------- Total from investment operations 4.90 (2.94) (1.60) 2.09 1.16 ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders from: Net investment income (0.03) (0.19) (0.25) (0.14) (0.01) In excess of net investment income (0.02) - - - - Net realized gains - (0.12) (0.71) - (0.13) In excess of net realized gains - (0.00)(d) (0.37) - - ---------- ---------- ---------- ---------- ---------- Total distributions (0.05) (0.31) (1.33) (0.14) (0.14) ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 11.16 $ 6.31 $ 9.56 $ 12.49 $ 10.54 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- TOTAL RETURN (a) 77.43% (30.96%) (12.94%) 19.98% 12.24% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 727,197 $ 524,741 $ 913,615 $1,725,651 $ 907,180 Net expenses to average daily net assets 1.18% 1.16% 1.24% (c) 1.24% (c) 1.35% Net investment income to average daily net assets 1.41% 2.75% 1.30% 1.40% 1.31% Portfolio turnover rate 73% 76% 88% 41% 35% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.00 (b) $ 0.02 $ 0.03 $ 0.02 $ 0.00 (b)
+ Computed using average shares outstanding throughout the period. (a) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Fees and expenses voluntarily waived or borne by the Manager were less than $.01 per share. (c) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .06% and .035% of average daily net assets for the years ended February 28, 1997 and 1998, respectively. (d) The distribution in excess of net realized gains was $0.0005. 22 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A Series of GMO Trust)
Financial Highlights (For a Class IV share outstanding throughout each period) - ------------------------------------------------------------------------------------------------- Year Ended February 28/29, -------------------------------------------- 2000 1999 1998 * ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 6.31 $ 9.56 $ 8.62 ---------- ---------- ---------- Income (loss) from investment operations: Net investment income 0.13 + 0.28 0.01 + Net realized and unrealized gain (loss) 4.77 (3.21) 0.93 ---------- ---------- ---------- Total from investment operations 4.90 (2.93) 0.94 ---------- ---------- ---------- Less distributions to shareholders from: Net investment income (0.03) (0.20) - In excess of net investment income (0.02) - - Net realized gains - (0.12) - In excess of net realized gains - 0.00 (d) - ---------- ---------- ---------- Total distributions (0.05) (0.32) - ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 11.16 $ 6.31 $ 9.56 ---------- ---------- ---------- ---------- ---------- ---------- TOTAL RETURN (a) 77.76% (31.01%) 10.90% *** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 480,208 $ 261,187 $ 672,020 Net expenses to average daily net assets 1.13% 1.12% 1.22% **(c) Net investment income to average daily net assets 1.45% 2.87% 0.65% ** Portfolio turnover rate 73% 76% 88% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.00 (b) $ 0.02 $ 0.00 (b)
* Period from January 9, 1998 (commencement of operations) to February 28, 1998. ** Annualized. *** Not annualized. + Computed using average shares outstanding throughout the period. (a) Calculation excludes purchase premiums and redemption fees. The total return would have been lower had certain expenses not been waived during the period shown. (b) Fees and expenses voluntarily waived or borne by the Manager were less than $.01 per share. (c) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .04% of average daily net assets. (d) The distribution in excess of net realized gains was $0.0005. See accompanying notes to the financial statements. 23 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Notes to Financial Statements February 29, 2000 - ------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Emerging Markets Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Emerging Markets Fund seeks high total return through investment in equity securities traded in the securities markets of developing countries in Asia, Latin America, the Middle East, Africa, and Europe ("Emerging Markets"). The Fund's benchmark is the IFC Investable Index. The Fund offers two classes of shares: Class III and Class IV. The principal economic difference between the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully described in the Trust's prospectus. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Securities for which quotations are not readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. Certain securities held by the Fund were valued on the basis of a price provided by a principal market maker. These prices may differ from the value that would have been used had a broader market for the securities existed and the differences could be material to the financial statements. 24 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - ------------------------------------------------------------------------------- FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. There were no forward foreign currency contracts outstanding as of February 29, 2000. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instruments. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 29, 2000 there were no open written option contracts. 25 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - ------------------------------------------------------------------------------- The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. FUTURES CONTRACTS The Fund may purchase or sell index futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a given date. The Fund may use futures contracts to manage its exposure to the stock and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 29, 2000, there were no outstanding futures contracts. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into swap agreements to manage its exposure to the equity markets. The Fund enters into total return swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. Total return swaps are marked to 26 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - ------------------------------------------------------------------------------- market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or that there may be unfavorable changes in the price of the security or index underlying these transactions. See Note 6 for a summary of all open swap agreements as of February 29, 2000. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 29, 2000, the Fund loaned securities having a market value of $15,930,487 collateralized by cash in the amount of $16,537,900 which was invested in a short-term instrument. TAXES The 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"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U. S. federal income tax purposes. Therefore, no provision for U. S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund has recorded a current tax liability of $7,335,045 for capital gains taxes and a deferred tax liability in respect of unrealized appreciation on foreign securities of $5,378,025 for capital gains and repatriation taxes. The Fund has incurred $15,427,437 related to capital gain taxes which is included in net realized gain in the Statement of Operations. DISTRIBUTIONS TO SHAREHOLDERS The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. The Fund declares separate dividends from net investment income on each class of shares. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 27 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - ------------------------------------------------------------------------------- Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to foreign currency and passive foreign investment company transactions, foreign taxes and differing treatments for redemptions in-kind. Gross gains resulting from such in-kind transactions amounted to $114,069. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 29, 2000. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains U. S. federal tax rules versus accounting principles generally accepted in the United States. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Accumulated Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital - --------------------------- ------------------------ ------------------------------- $(8,905,402) $20,883,858 $(11,978,456)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is 1.60% of the amount invested. In the case of cash redemptions, the fee is .40% of the amount redeemed. These fees will be reduced by 50% with respect to any portion of a purchase or redemption that is offset by a corresponding redemption or purchase, respectively, occurring on the same day. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. These fees are allocated relative to each class' net assets on the 28 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - ------------------------------------------------------------------------------- share transaction date. For the year ended February 29, 2000, the Fund received $948,179 in purchase premiums and $717,169 in redemption fees. There is no premium for reinvested distributions. While no purchase premium is normally charged with respect to in-kind purchases of Fund shares, a purchase premium of up to .20% may be charged on certain in-kind purchases. INVESTMENT RISK Investments in securities of emerging countries present certain risks that are not inherent in many other investments. Many emerging countries present elements of political and/or economic instability. The securities markets of emerging countries are generally smaller and less developed than the securities markets of the U.S. and developed foreign markets. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging countries are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .81% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .15% for Class III shares and .105% for Class IV shares. GMO has entered into a binding agreement effective until June 30, 2000 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding custody fees, brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceed the management fee. Prior to March 1, 1999, GMO earned a management fee at the annual rate of 1.00% of average daily net assets. GMO had agreed to waive a portion of its fee and bear other expenses to the extent that the Fund's annual expenses (including the management fee but excluding custody fees, brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceeded .81% of average daily net assets. The Manager has entered into a Consulting Agreement with Dancing Elephant, Ltd. (the "Consultant") with respect to the management of the portfolio. 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. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 29, 2000, was $11,844. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 29 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - -------------------------------------------------------------------------------\ 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 29, 2000, were as follows:
Purchases Proceeds ------------------------- ------------------------- U.S. Government securities $ 20,620,736 $ 18,586,412 Investments (non-U.S. Government securities) 722,907,036 831,434,667
At February 29, 2000, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation ---------------------------- -------------------------- ------------------------- ------------------------- $1,185,203,467 $261,656,701 $240,589,353 $21,067,348
4. PRINCIPAL SHAREHOLDERS At February 29, 2000, 24.14% of the outstanding shares of the Fund were held by two shareholders. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 29, 2000 February 28, 1999 ------------------------------------------- ------------------------------------- Class III: Shares Amount Shares Amount -------------------- ------------------ ------------------ --------------- Shares sold 8,250,164 $ 75,191,088 16,151,855 $ 124,491,194 Shares issued to shareholders in reinvestment of distributions 238,039 2,615,828 3,383,887 22,834,853 Shares repurchased (26,449,273) (261,224,958) (31,966,910) (225,170,940) -------------------- ------------------ ------------------ --------------- Net decrease (17,961,070) $ (183,418,042) (12,431,168) $ (77,844,893) -------------------- ------------------ ------------------ --------------- -------------------- ------------------ ------------------ ---------------
30 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - ------------------------------------------------------------------------------- SHARE TRANSACTIONS - CONTINUED
Year Ended Year Ended February 29, 2000 February 28, 1999 ------------------------------------------ ----------------------------------------- Class IV: Shares Amount Shares Amount -------------------- -------------------- -------------------- ------------------ Shares sold 13,191,632 $ 146,997,411 1,052,163 $ 11,220,974 Shares issued to shareholders in reinvestment of distributions 20,982 230,234 1,540,180 10,691,678 Shares repurchased (11,566,413) (108,208,373) (31,493,803) (205,245,724) -------------------- -------------------- -------------------- ------------------ Net increase (decrease) 1,646,201 $ 39,019,272 (28,901,460) $ (183,333,072) -------------------- -------------------- -------------------- ------------------ -------------------- -------------------- -------------------- ------------------
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 29, 2000 is as follows: SWAP AGREEMENTS
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------ ------------ ------------------------------------------------------- ------------------- $ 2,686,903 3/13/00 Agreement with Credit Agricole Indosuez (W.I. Carr) $ 556,061 dated 3/12/99 to receive (pay) the notional amount multiplied by the return on the MSCI Taiwan Index and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. 3,782,657 3/30/00 Agreement with Credit Agricole Indosuez (W.I. Carr) 906,390 dated 3/16/99 to receive (pay) the notional amount multiplied by the return on the MSCI Taiwan Index and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread.
31 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Notes to Financial Statements - continued February 29, 2000 - ------------------------------------------------------------------------------- SWAP AGREEMENTS - CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------ ------------ ------------------------------------------------------- ------------------- $ 3,721,299 3/30/00 Agreement with Credit Agricole Indosuez (W.I. Carr) $ 891,288 dated 3/17/99 to receive (pay) the notional amount multiplied by the return on the MSCI Taiwan Index and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. 9,000,763 4/28/00 Agreement with Goldman Sachs International dated (386,129) 4/28/99 to receive (pay) the notional amount multiplied by the return on the MSCI Taiwan Index and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. 6,050,865 5/02/00 Agreement with Goldman Sachs International dated 2,238,442 4/12/99 to receive (pay) the notional amount multiplied by the return on the MSCI Taiwan Index and to pay the notional amount multiplied by 12 month LIBOR adjusted by a specified spread. 5,234,725 8/30/00 Agreement with Lehman Brothers Finance S.A. dated (384,679) 8/17/99 to receive (pay) the notional amount multiplied by the return on the MSCI Taiwan Index and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. ------------------- $ 3,821,373 ------------------- -------------------
32 GMO EMERGING MARKETS FUND (A Series of GMO Trust) Federal Tax Information - (Unaudited) February 29, 2000 - ------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000, all the Fund's distributions are from investment company taxable income. At February 29, 2000, the Fund had a capital loss carryforward available to offset future capital gains, if any, of the following amount:
Year of Expiration Amount ------------------ ------ 2007 $199,563,451
33 GMO INTERNATIONAL SMALL COMPANIES FUND (A Series of GMO Trust) PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham and Mr. Darnell have been portfolio managers at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. Mr. Berkley has been with GMO and involved in portfolio management for more than ten years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO International Small Companies Fund returned 9.6% for the fiscal year ended February 29, 2000 as compared to 25.4% for EAFE and 28.8% for the Salomon EMI World ex-U.S. Index of smaller capitalization stocks. Consistent with the Fund's investment objective and policies, the Fund was invested substantially in common stocks that ranked within the smallest 50% by market capitalization within each country. In international markets, the fiscal year was characterized by explosive performance of the technology and telecommunications sectors. This effect was particularly strong in the fourth quarter of 1999, during which period the MSCI EAFE Growth Index returned 25.6% versus 8.9% for MSCI EAFE Value. While this paralleled the run-up in the U.S. NASDAQ Index, the EAFE Index contains relatively few pure Internet and information technology stocks. The international rally focused more on the best available approximation, which is telecommunications stocks. Both fixed line and wireless companies performed very strongly in the markets, as did the related equipment providers. The optimism about these companies came despite the failure of many other growth stocks, such as pharmaceuticals and established software companies, to produce continued strong earnings growth. In contrast, many neglected stocks - typically smaller capitalization, value companies - had lackluster market performance for the fiscal year. Throughout the bull market of the late 1990's, growth stocks have enjoyed increasing "multiple expansion" to higher relative levels of price-to-book and price-to-earnings. As a result the spread, or discount, between the valuations of the cheaper stocks on such measures and the most expensive stocks has reached levels unprecedented in history. These wide gaps are considerably beyond what could possibly be justified by the relatively modest differences in consensus growth rate estimates. This is true even if no regression of the higher profitability of telecommunications stocks took place in the next 20 years, which would be contrary to the entire history of corporate competition. The Fund's underperformance relative to EAFE and EMI for the fiscal year is largely a result of benchmark mismatch. The Fund's core buyable universe is the 70% smallest stocks within each EAFE market. The Fund underperformed that universe by a relatively small (though still disappointing) -3%. However that universe fared much worse than did the large capitalization EAFE or smaller capitalization, more growth oriented, EMI Indices. A tilt towards value stocks within the smaller capitalization universe hurt performance, most notably in the United Kingdom. Stock selection within small was generally negative in Europe and positive within Asia. Country selection was a minor negative impact. The overweight in South East Asian markets was not as beneficial for smaller capitalization stocks as it was for larger capitalization firms. And the Fund suffered from being underweight in Japan earlier in the fiscal year. OUTLOOK The attractive discounts available for smaller capitalization stocks represent an exceptional opportunity relative to large cap stocks. It would require relative returns in excess of +50% for smaller capitalization stocks to return to their historical average relative valuation level (on price-to-earnings or price-to-book). In addition, valuation techniques are well positioned to add value in country selection as cheaper countries in South East Asia and elsewhere are at abnormally large discounts. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. We believe the rally thus far has been fueled less by earnings growth or corporate restructuring than it has by revaluing markets and currencies that were priced for destruction. Empirical research shows that markets after a collapse tend to have a stronger second year than the first year. This holds true for both developed and emerging markets. We have long argued that it takes an economy four to ten quarters to realize the full benefits of currency devaluation as it takes exporters this long to increase capacity and procure orders. During this period, the premium price of imports forces a resumption of local spending, which inevitably benefits local producers. We have seen this pattern in India (1993), Mexico (1994) and Thailand (1998) and are now starting to see the same effect in Brazil and Russia. In the coming year we expect to see most emerging economies grow strongly and corporate earnings increase sharply in tandem. Additionally, most emerging countries with undervalued currencies are running large and increasing trade surpluses. For a few large markets, notably Brazil, Indonesia, Turkey and Russia, we are likely to see significant decreases in both nominal and real interest rates as a result of falling inflation. The corporate restructuring in Korea and India and the resulting benefits have set a pattern for other countries to follow. In an environment of global growth, each of these factors supports our continued enthusiasm for this asset class. Within Asia, we prefer countries that are likely to have economic growth that will surprise on the upside. These markets, including Indonesia, Malaysia and Thailand, have not participated in the recent rally. Indonesia, trading at under five times peak earnings, could be the most explosive market over the next 5 years. On the other hand, we have been reducing our position in Korea as its double-digit GDP growth and 25% rise in industrial production may soon force interest rate hikes to cool the economy. India's technology boom mirrors the Internet hysteria in the U.S., and we continue to reduce our position there, though parabolic moves in some of these stocks have kept us overweight. We are cautiously reducing our underweight in Turkey, anticipating it may take several months to see whether the IMF program will be successful. In Latin America we are positive about Brazil. The government response to the January 1999 currency crisis has led to an improved trade balance and controlled inflation. Earnings growth is likely to be strong in 2000, exceeding current expectations. Though the Mexican economy has benefited from solid policymaking and robust exports to the U.S., the peso is the most overvalued of all emerging currencies. Because the stock market is also expensive, we are underweight by 5.2% relative to the benchmark in Mexico. The technology and telecommunications mania has continued to make value investing a challenge in the short term. Nevertheless, we are confident that our emphasis on buying inexpensive countries and companies will continue to produce excellent long-term returns. THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE. - ------------------------------------------------------------------------------- COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO EMERGING MARKETS FUND CLASS III SHARES AND THE IFC INVESTABLE COMPOSITE AS OF FEBRUARY 29, 2000
----------------------------------------- Average Annual Total Return ----------------------------------------- 1yr 5yr Since Inception ----------------------------------------- 12/9/93 Class III 73.89% 7.06% 5.24% ----------------------------------------- 1/9/98 Class IV 74.06% n/a 14.33% -----------------------------------------
[Line Graph Appears Here.]
Date GMO Emerging Markets Fund IFC Investable Composite 12/9/93 9,840 10,000 12/31/93 10,838 11,127 3/31/94 10,946 9,812 6/30/94 10,837 9,500 9/30/94 13,125 11,776 12/31/94 11,519 9,792 3/31/95 9,601 8,352 6/30/95 10,722 9,082 9/30/95 10,808 9,051 12/31/95 10,071 8,967 3/31/96 11,012 9,642 6/30/96 11,790 10,060 9/30/96 11,234 9,834 12/31/96 11,243 9,809 3/31/97 12,466 10,743 6/30/97 14,041 11,392 9/30/97 14,393 10,364 12/31/97 11,232 8,363 3/31/98 11,727 8,950 6/30/98 8,415 7,051 9/30/98 6,692 5,520 12/31/98 7,988 6,521 3/31/99 8,851 7,233 6/30/99 11,895 8,952 9/30/99 10,798 8,671 12/31/99 14,197 10,899 2/29/00 13,746 10,889
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