-----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, DbNeUGkXrw/zAIt+CLArE41RWqSXihu15on+xu+mzAQAHBFAggiCznZp79/FBwbg TMunhgCCRdIunRUX1l6n4w== 0000950109-97-003722.txt : 19970508 0000950109-97-003722.hdr.sgml : 19970508 ACCESSION NUMBER: 0000950109-97-003722 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970228 FILED AS OF DATE: 19970507 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GMO TRUST CENTRAL INDEX KEY: 0000772129 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-04347 FILM NUMBER: 97597277 BUSINESS ADDRESS: STREET 1: 40 ROWES WHARF CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6173307500 FORMER COMPANY: FORMER CONFORMED NAME: GMO CORE TRUST DATE OF NAME CHANGE: 19900927 N-30D 1 ANNUAL REPORTS May 7, 1997 VIA EDGAR Securities and Exchange Commission Office of Filings, Information and Consumer Services 450 Fifth Street, NW Washington, D.C. 20549 RE: GMO Trust (the "Trust") File No. 811-4347 Ladies and Gentlemen: Pursuant to Rule 30(b)(2)-1 under the Investment Company Act of 1940, as amended, we are transmitting via EDGAR the GMO Trust Annual Reports for the period ended February 28, 1997. Please be advised that the above-referenced Fund's financials for the aforementioned period are included in this document. If you have any questions, please telephone the undersigned at (617) 330-6027. Thank you for your assistance with this matter. Very truly yours, Donna M. McCarthy Account Manager GMO Short-Term Income Fund (A Series of GMO Trust) Annual Report February 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 17, 1997 GMO Short-Term Income Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 28, 1997
Par Value Description Value ($) - ----------------------------------------------------------------------------------------------------------------- DEBT OBLIGATIONS - 96.9% Asset Backed Securities - 35.8% $ 463,100 Dilmun Capital Corp, Variable Rate, 6 mo. LIBOR + .88% (6.42%), due 11/15/03 463,678 5,000,000 First Chicago Master Trust II 95-0 Variable Rate, 1 mo. LIBOR + .23% (5.65%), due 2/15/04 5,018,750 2,000,000 MBNA Master Credit Card Trust 96-J Class A, Variable Rate, 1 mo. LIBOR + .15% (5.57%), due 2/15/06 2,005,000 1,000,000 National Premier Finance 95-2, 6.21% due 6/01/99 144A 998,000 1,500,000 National Premier Finance IX 96-1A, 7.20% due 7/01/00 1,524,000 2,000,000 Navistar Financial Dealer Note Master Trust 95-1 Class A, Variable Rate, 1 mo. LIBOR + .30% (5.74%), due 8/25/07 2,015,625 500,000 Premier Auto Trust 94-4 Certificates, 6.85% due 5/02/99 504,730 2,000,000 Student Loan Marketing Association Series 96-2 Class A2, Variable Rate, 3 mo. LIBOR +.71% (5.85%), due 7/27/09 2,007,000 118,050 Wilshire Liquidating Trust Series 96-1 144A Class 1, Variable Rate, 1 mo. LIBOR + .50% (6.00%), due 9/25/01 117,755 ----------------- 14,654,538 ----------------- Structured Notes - 9.0% 750,000 Federal Home Loan Bank, Variable Rate,((.50 x 10YR CMT) + 1.25%)(4.71%), due 3/16/98 736,664 1,000,000 Federal National Mortgage Association, Variable Rate,((.50 x 2YR CMT) + 1.80%)(4.91%), due 3/10/98 987,000 2,000,000 Student Loan Marketing Association, Variable Rate, (10.25% - 5YR DM SWAP)(4.84%), due 3/23/98 1,958,000 ----------------- 3,681,664 ----------------- U.S. Government - 22.8% 9,000,000 U.S. Treasury Note, 7.75% due 11/30/99 9,345,924 ----------------- U.S. Government Agency - 29.3% 350,000 Agency for International Development Floater (Support of Botswana), Variable Rate, 6 mo. U.S. Treasury Bill + .40% (5.63%), due 10/01/12 348,250 2,250,000 Agency for International Development Floater (Support of C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury Bill + .40% (5.63%), due 10/01/12 2,247,188 2,500,000 Agency for International Development Floater (Support of Honduras), Variable Rate, 3 mo. U.S. Treasury Bill x 117% (5.82%), due 10/01/11 2,501,563 104,830 Agency for International Development Floater (Support of Peru), Variable Rate, 6 mo. U.S. Treasury Bill + .35% (5.58%), due 5/01/14 104,306 6,750,298 Small Business Administration Pool #502320, Variable Rate, Prime - 2.18% (6.06%), due 8/25/18 6,804,300 ----------------- 12,005,607 ----------------- TOTAL DEBT OBLIGATIONS (Cost $39,740,590) 39,687,733 -----------------
See accompanying notes to the financial statements. 1 GMO Short-Term Income Fund (A Series of GMO Trust) Schedule of Investments-continued (showing percentage of total net assets) February 28, 1997
Par Value Description Value ($) - ----------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS - 1.7% Repurchase Agreement - 1.7% $ 687,131 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97 with a maturity value of $687,409 and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $701,618 (Cost $687,131). 687,131 -------------------- TOTAL INVESTMENTS - 98.6% (Cost $40,427,721) * 40,374,864 Other Assets and Liabilities (net) - 1.4% 562,073 -------------------- TOTAL NET ASSETS - 100.0% $ 40,936,937 ==================== Notes to the Schedule of Investments: CMT - Constant Maturity Treasury Index DM SWAP - 5 year Deutsche Mark Constant Maturity Swap Rate Variable rates - The rates shown on variable rate notes are the current interest rates at February 28, 1997, which are subject to change based on the terms of the security. 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. * The aggregate identified cost for federal income tax purposes is $40,427,721, resulting in gross unrealized appreciation and depreciation of $50,243 and $103,100, respectively, and net unrealized depreciation of $52,857.
2 See accompanying notes to the financial statements. GMO Short-Term Income Fund (A Series of GMO Trust) Statement of Assets and Liabilities - February 28, 1997 - -------------------------------------------------------------------------------- Assets: Investments, at value (cost $40,427,721) (Note 1) $ 40,374,864 Receivable for investments sold 12,708 Receivable for Fund shares sold 25,689 Interest receivable 548,688 Receivable for expenses waived or borne by Manager (Note 2) 12,432 --------------- Total assets 40,974,381 --------------- Liabilities: Payable to affiliate for (Note 2): Management fee 7,864 Shareholder service fee 4,719 Accrued expenses 24,861 --------------- Total liabilities 37,444 --------------- Net assets $ 40,936,937 --------------- Net assets consist of: Paid-in capital $ 40,679,507 Accumulated undistributed net investment income 328,181 Accumulated undistributed net realized loss (17,894) Net unrealized depreciation (52,857) =============== $ 40,936,937 =============== Shares outstanding 4,187,806 =============== Net asset value per share $ 9.78 ===============
See accompanying notes to the financial statements. 3 GMO Short-Term Income Fund (A Series of GMO Trust) Statement of Operations - Year Ended February 28, 1997 - -------------------------------------------------------------------------------- Investment income: Interest $ 1,679,824 --------------- Expenses: Management fee (Note 2) 69,134 Audit fees 25,193 Registration fees 10,526 Custodian and transfer agent fees 5,617 Legal fees 1,204 Trustee fee (Note 2) 150 Miscellaneous 430 Fees waived or borne by Manager (Note 2) (93,681) --------------- 18,573 Shareholder service fee (Note 2) 36,264 --------------- Net expenses 54,837 --------------- Net investment income 1,624,987 --------------- Realized and unrealized gain (loss): Net realized gain on investments 76,160 Change in net unrealized appreciation (depreciation) on investments (75,627) --------------- Net realized and unrealized gain 533 --------------- Net increase in net assets resulting from operations $ 1,625,520 ===============
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 February 28, 1997 February 29, 1996 ---------------------- ----------------------- Increase (decrease) in net assets: Operations: Net investment income $ 1,624,987 $ 556,078 Net realized gain 76,160 74,630 Change in net unrealized appreciation (depreciation) (75,627) 31,945 --------------------- --------------------- Net increase in net assets resulting from operations 1,625,520 662,653 --------------------- --------------------- Distributions to shareholders from: Net investment income (1,442,981) (509,777) --------------------- --------------------- Fund share transactions: (Note 5) Proceeds from sale of shares 94,033,050 29,521,366 Net asset value of shares issued to shareholders in payment of distributions declared 1,044,258 477,330 Cost of shares repurchased (65,388,935) (27,279,043) --------------------- --------------------- Net increase in net assets resulting from Fund share transactions 29,688,373 2,719,653 --------------------- --------------------- Total increase in net assets 29,870,912 2,872,529 Net assets: Beginning of period 11,066,025 8,193,496 --------------------- --------------------- End of period (including accumulated undistributed net investment income of $328,181 and $146,175, respectively) $ 40,936,937 $ 11,066,025 ===================== =====================
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, ------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------------- ------------ ------------- ------------ ------------ Net asset value, beginning of period $ 9.77 $ 9.56 $ 9.79 $ 10.05 $ 10.11 --------------- ------------ ------------- ------------ ------------ Income from investment operations: Net investment income 0.47 0.57 0.63 0.44 0.46 Net realized and unrealized gain (loss) 0.06 0.20 (0.28) (0.09) 0.30 --------------- ------------ ------------- ------------ ------------ Total from investment operations 0.53 0.77 0.35 0.35 0.76 --------------- ------------ ------------- ------------ ------------ Less distributions to shareholders: From net investment income (0.52) (0.56) (0.58) (0.46) (0.38) From net realized gains - - - (0.15) (0.44) --------------- ------------ ------------- ------------ ------------ Total distributions (0.52) (0.56) (0.58) (0.61) (0.82) --------------- ------------ ------------- ------------ ------------ Net asset value, end of period $ 9.78 $ 9.77 $ 9.56 $ 9.79 $ 10.05 =============== ============ ============= ============ ============ Total Return (a) 5.62% 8.32% 3.78% 3.54% 8.25% Ratios/Supplemental Data: Net assets, end of period (000's) $ 40,937 $ 11,066 $ 8,193 $ 8,095 $ 10,499 Net expenses to average daily net assets 0.20% 0.25% 0.25% 0.25% 0.25% Net investment income to average daily net assets 5.88% 6.49% 5.02% 4.35% 4.94% Portfolio turnover rate 287% 139% 335% 243% 649% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.03 $ 0.03 $ 0.02 $ 0.02 $ 0.03
(a) 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 28, 1997 - -------------------------------------------------------------------------------- 1. Significant accounting policies The 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 current income to the extent consistent with the preservation of capital and liquidity through investment in a portfolio of high quality short-term instruments. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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 investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 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 investments in securities held by the Fund were valued on the basis of a price provided by a principal market maker. At February 28, 1997, the total value of these securities represented 10% of net assets. These prices may differ from the value that would have been used had a broader market for the securities existed. 7 GMO Short-Term Income Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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, the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. 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 certain member firms of the New York Stock Exchange. 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 28, 1997, 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 taxable 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 federal income tax purposes. Therefore, no provision for federal income or excise tax is necessary. 8 GMO Short-Term Income Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. 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. 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 in such manner as deemed equitable by the Trustees, 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 .25% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services 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 agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .05% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .20%; thus, the net annual expense ratio after the waiver is unchanged. 9 GMO Short-Term Income Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997 was $150. 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 28, 1997, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Proceeds ---------------- ---------------- U.S. Government securities $ 71,114,672 $ 50,153,867 Investments (non-U.S. Government securities) 30,569,442 20,125,755
4. Principal shareholders At February 28, 1997, 61% 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 28, 1997 February 29, 1996 --------------------------- ---------------------------- Shares sold 9,668,234 3,044,961 Shares issued to shareholders in reinvestment of distributions 108,123 49,952 Shares repurchased (6,721,285) (2,819,011) ------------------- ------------------- Net increase 3,055,072 275,902 Fund shares: Beginning of period 1,132,734 856,832 ------------------- ------------------- End of period 4,187,806 1,132,734 =================== ===================
10 GMO Short-Term Income Fund (A Series of GMO Trust) Federal Income Tax Information on Distributions-(Unaudited) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all the Fund's distributions are from investment company taxable income. At February 28, 1997, the Fund had a capital loss carryforward available to offset future capital gains, if any, of the following amounts:
Year of Expiration Amount ------------------ ------ 2003 $ 17,757
The Fund has also elected to defer to March 1, 1997 post-October losses of $137. 11 GMO Short-Term Income 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 Short-Term Income Fund returned 5.6% for the fiscal year ended February 28, 1997, as compared to 5.2% for the Salomon Brothers 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. Although short-term interest rates rose modestly in the U.S. during the fiscal year, the Fund outperformed its benchmark by 0.4%. This was due to the Fund's holdings of highly-rated asset-backed securities and higher-yielding government agency issues. At the fiscal year end approximately 36% 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. The additional yield provided by these holdings offset losses due to the longer-than-benchmark maturity of the Fund. GMO believes that asset-backed securities will continue to offer attractive opportunities to enhance the return of the Fund. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co LLC Management. They are not meant as investment advise. Comparison of Change in Value of a $10,000 Investment in GMO Short-Term Income Fund Class III shares and the Salomon Brothers 3 Month Treasury Bill Index As of February 28, 1997 Average Annual Total Return
Since Inception 1 Year 5 Year 06/30/91 Class III 5.6% 5.9% 5.9%
[LINE GRAPH APPEARS HERE]
Date GMO Short-Term Income Fund Salomon Brothers 3 Month Treasury-Bill Index 06/30/91 10,000 10,000 02/29/92 10,381 10,331 02/28/93 11,239 10,686 02/28/94 11,637 11,014 02/28/95 12,088 11,505 02/29/96 13,094 12,158 02/28/97 13,817 12,817
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Past performance is not indicative of future performance. Information is unaudited. GMO International Core Fund (A Series of GMO Trust) Annual Report February 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 22, 1997 GMO International Core Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------- STOCK AND EQUIVALENTS - 96.8% Australia - 5.5% 97,500 Aberfoyle Ltd 289,096 364,643 Adelaide Brighton Ltd 523,616 427,200 Advance Property Fund 494,073 116,500 Amalgamated Holdings Ltd 538,042 39,200 Amcor Ltd 258,021 8,962 Ashton Mining Ltd 13,982 4,420,872 Australia and New Zealand Banking Group Ltd 27,589,106 161,900 Australian Gas & Light 926,164 1,738,634 Australian National Industries Ltd 1,929,825 3,660,471 Boral Ltd 9,944,402 89,945 Bougainville Copper Ltd * 39,097 219,800 Broken Hill Proprietary Ltd 2,908,879 185,100 BT Property Trust 247,120 1,099,505 Burns Philp & Co Ltd 1,706,872 255,435 Caltex Australia Ltd 862,469 30,200 Capcount Property Trust 20,628 393,900 Capral Aluminum Ltd 1,357,509 197,200 Centaur Mining & Exploration Ltd * 292,357 184,700 Coca-Cola Amatil Ltd 1,691,697 3,939,827 Coles Myer Ltd 17,339,391 227,822 Commonwealth Bank of Australia 2,267,030 237,773 Consolidated Rutile Ltd 191,942 228,589 Cortecs International Ltd * 860,539 13,200 Coventry Group Ltd 52,766 253,200 CRA Ltd 3,791,531 130,900 CSL Ltd 665,510 2,972,464 CSR Ltd 10,497,881 668,800 Cultus Petroleum * 1,100,540 34,929 Dominion Mining Ltd Warrants 12/31/98 * 10,845 69,859 Dominion Mining Ltd * 48,260 403,891 Email Ltd 1,275,946 149,700 Emperor Mines Ltd * 261,444 57,482 Energy Resources of Australia Class A 267,705 100,000 FAI Life Ltd 63,648 103,900 Faulding (FH) & Co Ltd 604,854 270,327 Foodland Associated 1,300,932 5,764,273 Fosters Brewing Group Ltd 12,035,675 76,525 G E Crane Holdings Ltd 694,965 967,928 General Property Trust Units 1,885,777 3,937,376 Goodman Fielder Ltd 4,767,658 175,900 Grosvenor Trust 208,896 131,000 GWA International Ltd 224,718 673,207 Hardie (James) Industries Ltd 1,933,410 238,051 HIH Winterthur International Holdings 570,955
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------- Australia - continued 10,500 Hills Motorway Group 15,078 43,500 Holyman Ltd 176,792 13,200 Jupiters Ltd 28,483 70,400 KLZ Ltd 193,441 192,322 Leighton Holdings 835,970 14,400 Lend Lease Corp Ltd 263,337 441,990 Macmahon Holdings 343,073 218,300 Mayne Nickless Ltd 1,289,472 5,550 Memtec Ltd 114,160 111,680 Metal Manufactures Ltd 272,194 2,104,103 MIM Holdings Ltd 2,923,437 277,488 Mirvac Ltd 568,620 93,694 Mount Leyshon Gold Mines 161,450 511,528 National Australia Bank Ltd 6,440,119 51,901 National Consolidated Ltd 37,868 6,023,115 News Corp Ltd 32,071,473 3,028,955 News Corp Ltd Preferred 1.19% 13,683,256 205,701 Normandy Mining Ltd 284,204 481,362 North Broken Hill Peko Ltd 1,558,050 287,836 Orbital Engine Corp * 230,121 7,400 Pacific BBA Ltd 24,699 1,465,447 Pacific Dunlop Ltd 3,526,188 54,400 Petroleum Securities Australia * 232,239 4,834,270 Pioneer International Ltd 14,371,540 407,321 PMP Communications Ltd 1,027,528 157,800 Portman Mining Ltd 325,808 87,342 Publishing & Broadcasting Ltd 437,277 893,789 Qantas Airways Ltd 1,692,772 102,400 QBE Insurance Group Ltd 512,665 1,197,769 QCT Resources Ltd 1,654,881 904,154 QNI Ltd 1,866,800 80,700 Reinsurance Australia 274,360 429,800 RGC Ltd 1,708,087 404,581 Rothmans Holdings Ltd 2,732,111 1,855,559 Santos Ltd 6,682,922 1,618,836 Schroders Property 2,990,566 120,500 Sea World Property Trust 159,005 65,445 Siddons Ramset Ltd 339,333 143,739 Simsmetal Ltd 870,471 24,300 Skilled Engineering Ltd 64,130 128,400 Smith (Howard) Ltd 1,077,070 443,400 Southcorp Holdings Ltd 1,569,402 41,912 St George Bank 250,497 682,064 Stockland Trust Group 1,752,374 211,900 Tabcorp Holdings 972,058
2 See accompanying notes to the financial statements. GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------------------------------------------ Australia - continued 274,984 Ticor Ltd * 228,384 88,900 Village Roadshow 294,648 19,799 W H Soul Pattison & Co Ltd 860,607 569,571 Walker Corp 402,312 95,300 Westfield Holdings 1,472,040 1,338,284 Westfield Trust Units 2,576,165 1,079,191 Westpac Banking Corp 6,114,977 317,200 Westpac Property Trust 438,255 209,191 Wills (WD & HO) Holdings Ltd 407,559 ------------------- 235,956,101 ------------------- Austria - 1.2% 2,366 Allgemeine Baugesellschaft AG Preferred 7.00% 86,824 1,851 Allgemeine Baugesellschaft AG * 166,698 5,701 Austrian Airlines * 849,306 32,818 Bank Austria AG (Participating Certificate) 966,763 35,877 Bau Holding AG Preferred 2.42% (Non Voting) 1,721,197 46,357 Brau Union AG 2,614,146 3,247 BWT AG 340,245 71,776 Creditanstalt-Bankverein 4,410,033 58,138 Creditanstalt-Bankverein Preferred 1.65% 2,225,952 5,512 EA-Generali AG 1,530,956 2,985 EA-Generali AG Preferred 6.00% 310,780 32,448 EVN Energie-Versorgung Niederoesterreich AG 4,776,584 6,295 Jenbacher Werke AG 182,791 11,247 Lenzing AG 541,468 19,627 Leykam-Muerztaler Papier und Zellstoff AG 546,791 5,940 Miba Holding AG Class B Preferred 1.34% 257,974 57,039 OEMV AG 6,721,089 11,739 Oesterreichische Brau Beteiligungs AG 721,263 95,365 Oesterreichische Elektrizitaetswirtschafts AG 6,926,909 114,562 Oesterreichische Laenderbank AG 7,839,183 35,056 Oesterreichische Laenderbank AG Preferred (Non Voting) 1,230,377 5,562 Perlmooser Zementwerke AG 287,903 49,253 Radex-Heraklith AG 1,786,485 7,962 RAS Versicherungs AG 984,427 18,054 Steyr-Daimler-Puch AG * 319,104 4,103 Strabag Oesterreich AG 238,627 8,443 Universale Bau AG 333,991 945 Wiener Allianz Versicherungs AG 107,376 10,873 Wienerberger Baustoffindustrie AG 1,973,964 ------------------- 50,999,206 ------------------- Belgium - 0.0% 2,908 Banque Bruxelles Lambert 629,596 412 Banque Nationale de Belgique 627,594 2,987 Powerfin SA 428,846 ------------------- 1,686,036 -------------------
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 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------ Canada - 2.6% 78,302 Abitibi-Price Inc 1,291,762 30,907 Agrium Inc * 423,957 59,800 Air Canada Inc * 301,866 138,105 Alberta Energy Ltd 2,904,762 77,200 Anderson Exploration Ltd * 917,770 12,800 Avenor Inc 220,528 73,916 Bank of Nova Scotia 2,817,341 41,200 BC Telecom Inc 901,222 128,392 BCE Inc 6,236,907 13,800 BCE Mobile Communications * 439,169 1,000 Biochem Pharma Inc * 53,040 126,900 Bombardier Inc Class B 2,436,992 40,500 Brascan Ltd Class A (Convertible) 970,353 20,900 CAE Industries Inc 174,307 13,400 Cambridge Shopping Centres Ltd 103,424 119,606 Canadian Imperial Bank of Commerce 5,801,359 24,100 Canadian Marconi Co 305,900 41,300 Canadian National Railway 1,495,611 6,612 Canadian Natural Resources * 157,693 44,400 Canadian Pacific Ltd 1,091,404 64,700 Canadian Tire Corp Ltd Class A 1,178,601 17,400 Canfor Corp 184,578 29,800 CCL Industries Class B 346,638 193,411 Cominco Ltd 5,518,347 119,100 Corel Corp * 775,470 25,200 Co-Steel Inc 414,807 32,800 Cott Corp * 322,745 50,700 Dofasco Inc 918,008 64,900 Dominion Textile Inc 303,870 256,118 Domtar Inc 2,332,774 32,700 Donohue Inc Class A 629,168 3,600 Dupont Canada Class A 87,044 58,800 Echo Bay Mines Ltd * 455,981 47,000 Edper Group Ltd Class A 804,594 10,000 Extendicare (Voting Shares) * 134,611 6,000 Falconbridge Ltd 140,025 120,107 Fletcher Challenge Canada Class A 1,994,607 130,002 Gulf Canada Resources Ltd * 913,029 8,300 Hudsons Bay Co 166,073 143,200 Imasco Ltd 3,928,598 122,307 Imperial Oil Ltd 5,368,659 54,200 Inco Ltd 1,909,233 39,300 Inmet Mining Ltd * 264,511 18,600 International Forest Products A * 136,074 4,600 IPL Energy Inc 134,443
4 See accompanying notes to the financial statements. GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------- Canada - continued 13,500 Ipsco Inc 390,116 87,700 Laidlaw Inc Class B (Non Voting) 1,215,828 268,919 Macmillan Bloedel Ltd 3,718,318 23,800 Magna International Class A 1,254,510 1,100 MDS Inc Class B 22,332 112,400 Methanex Corp * 1,101,880 35,000 Mitel Corp * 197,161 43,300 Molson Co Ltd, Class A 753,925 42,100 Moore Corporation Ltd 930,149 133,200 Newbridge Networks Corp * 4,234,062 9,800 Noma Industries Ltd Class A 29,753 84,801 Noranda Forest Inc 589,370 5,100 Noranda Inc 122,939 73,602 Norcen Energy Resource 1,574,993 442,500 Nova Corp of Alberta 4,062,751 79,500 Nova Scotia Power Inc 822,975 39,800 Numac Energy Inc * 181,981 35,300 Oshawa Group Ltd Class A 528,118 801 Petro Canada 11,603 3,900 Potash Corp of Saskatchewan 307,144 700 Power Corp of Canada Ltd 14,851 6,800 Provigo Inc * 28,107 2,600 QLT Phototherapeutics * 70,378 28,800 Quebecor Inc Class B 528,846 20,100 Ranger Oil Ltd 181,604 56,700 Repap Enterprises Inc * 100,383 11,900 Rio Algom Ltd 302,528 27,100 Rogers Cantel Mobile Communications Class B * 455,995 103,826 Royal Bank of Canada 4,189,044 170,000 Seagram Ltd 6,635,087 25,900 Sears Canada Inc 249,166 50,800 Semi-Tech Class A 102,202 5,200 Shell Canada Ltd Class A 213,037 16,300 Slocan Forest Products Ltd 175,294 22,400 Southam Inc 345,775 4,300 Spar Aerospace Ltd 47,344 71,200 Stelco Inc Class A * 390,665 21,800 Suncor Inc 971,263 127,506 Teck Corp Class B 3,115,590 111,700 Telus Corp 1,691,558 78,500 Thomson Corp 1,616,633 3,205 Toronto Dominion Bank 90,272 8,200 Torstar Corp Class B 219,563 8,300 Total Petroleum North America 85,010 201,600 Transalta Corp 2,396,664
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 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------- Canada - continued 192,400 Transcanada Pipelines Ltd 3,568,176 43,701 United Dominion Inds Ltd 1,181,324 30,855 Westaim Corp * 101,578 109,600 Westcoast Energy Inc 1,992,509 10,800 Weston (George) Ltd 591,792 -------------------- 112,110,001 -------------------- Finland - 0.3% 38,400 Amer Group Class A 804,624 16,300 Cultor OY Class 1 987,408 255,000 Enso OY Class A 2,177,799 2,600 Finnair Class A 20,139 5,000 Huhtamaki OY Class L 234,364 23,738 Instrumentarium OY, Class A 891,077 7,991 Instrumentarium OY, Class B 293,618 25,500 Kesko OY 372,252 22,600 Metra AB Class A 1,328,646 60,700 Partek OY 1,004,252 126,508 Rautaruukki OY 1,190,983 2,500 Stockmann AB Class A 144,988 3,700 Stockmann AB Class B 202,089 94,500 Valmet OY 1,717,363 -------------------- 11,369,602 -------------------- France - 8.8% 31,999 Accor SA 4,403,352 101 Adecco SA * 32,637 13,847 Air Liquide L Shares 2,177,683 40,811 Alcatel Alsthom Cie Generale d'Electricite SA 4,190,482 350,391 Assurances Generales De France (Bearer) 12,330,998 257,666 Axa SA 17,154,216 257,666 Axa UAP * 922,610 347,785 Banque Nationale de Paris 15,779,829 28,976 Bertrand Faure SA 1,443,892 3,200 BIC SA 518,983 1,790 BIS SA 153,479 2,001 Bongrain 775,492 24,560 Bouygues 2,345,083 11,930 Canal Plus 2,236,365 23,510 Cap Gemini SA * 1,407,967 62,170 Casino Guichard-Perrachon 2,837,168 22,450 Casino Guichard-Perrachon Preferred 860,991 5,645 CEP Communications SA (Bearer) 465,686 158,668 Cerus * 3,854,396
6 See accompanying notes to the financial statements. GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------- France - continued 8,540 Cetelem 1,058,263 19,298 CGIP 5,504,230 139,567 Cie Bancaire SA 16,927,456 3,601 Cie Generale de Geophysique * 308,758 16,813 Ciments Francais 572,503 33,393 Ciments Francais Class B Preferred 15.12% 1,315,253 2,846 Clarins 394,633 12,086 Club Mediterranee SA 928,093 2,759 Colas SA 382,085 311,861 Compagnie de Suez SA 15,239,166 87,760 Credit Commercial de France 4,112,811 69,270 Credit Local de France SA 6,918,124 127,223 Credit Lyonnais * 5,057,836 35,124 Credit National 2,311,885 50 Damart SA 39,492 1,460 Dassault Electronique SA 169,133 20,127 Dollfus-Mieg and Cie 570,889 2,706 Eiffage SA 171,936 250,130 Elf Aquitaine SA 23,927,273 3,440 Elf Gabon 923,806 30,790 Elf Sanofi SA 3,048,033 47,878 Eridania Beghin-Say SA 7,739,743 3,950 Essilor International 1,084,338 5,342 Esso 590,711 880,570 Euro Disney SCA (Bearer) * 1,615,143 300 Europe 1 Communication 71,086 1,375,268 Eurotunnel SA Units (Bearer) * 1,701,795 128,663 Financiere de Paribas SA 8,760,005 82,507 FINEXTEL 1,397,491 136,264 GAN (Group Assurances National) * 3,566,069 2,046 Gaz Et Eaux 904,976 23,965 Generale Des Eaux 3,335,658 2,064 Group Axime * 264,462 7,290 Groupe Andre * 614,186 17,850 Groupe Danone 2,706,966 2,530 GTM-Entrepose 135,885 1,181 Guyenne Et Gascogne 406,291 2,290 Havas Advertising 277,342 900 Imetal 129,535 29,911 INGENICO SA 548,628 2,475 La Peyre 149,874 5,813 Labinal SA 1,321,299 302,215 Lafarge Coppee SA 18,937,173 83,645 Lagardere Groupe 2,466,495 13,190 Legris Industries 627,401
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 28, 1997
Shares Description Value ($) - ----------------------------------------------------------------------------------------------- France - continued 37,564 Lyonnaise Des Eaux 3,837,300 11,980 Metaleurop SA * 161,912 217,470 Michelin SA Class B 13,619,310 28,142 Moulinex SA * 652,018 56,856 Nord-Est 1,515,881 992 Parisienne de Reescompte (CPR-Cie) 84,639 20,640 Pechiney SA Class A 872,725 7,415 Pernod-Ricard 404,765 132,483 Peugeot SA 14,649,797 780 Pinault Printemps Redoute 330,083 16,120 Remy Cointreau SA 420,167 213,900 Renault SA 5,515,228 488,700 Rhone Poulenc SA Class A 17,155,495 13,264 Saint Louis 3,482,868 96,942 Saint-Gobain 14,292,960 19,450 Salomon SA 1,335,858 70 SAT SA De Telecommunication 20,777 900 SEFIMEG (Registered) 74,483 31,640 Seita 1,210,665 32,940 SGS Thomson Microelectronics * 2,165,241 49,350 Skis Rossignol 1,342,610 10,830 Societe Eurafrance 5,113,422 26,010 Societe Generale d 'Entreprise SA * 602,166 182,852 Societe Generale Paris 21,182,371 290 Sodexho Alliance 161,357 114,190 Sommer Allibert 3,467,409 152,948 SPIE Batignolles 8,056,394 6,703 Strafor Facom 529,435 7,020 Sylea (Bearer) 677,689 11,760 Technip SA (Compagnie Francaise) 1,188,942 198,923 Thomson CSF 6,302,214 98,330 Total SA 7,844,239 9,650 TV Francaise 894,318 330 Union Immobiliere de France 27,339 302,720 Usinor Sacilor 4,675,787 54,790 Valeo 3,692,865 21,912 Vallourec 1,294,190 51,619 Worms et Compagnie SA 3,442,898 --------------- 375,423,336 --------------- Germany - 9.0% 51,550 Adidas AG 4,931,480 176,800 AGIV AG * 2,921,881 363,000 Bankgesellschaft Berlin AG 6,945,208 854,950 BASF AG 31,525,078 1,574,800 Bayer AG 66,463,985
8 See accompanying notes to the financial statements. GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------ Germany - continued 50,350 Bayerische Hypotheken-und Wechsel - Bank AG 1,488,251 20,894 Berliner Kraft und Licht AG Class A 5,841,706 402,050 BHF Bank AG 9,526,123 32,500 Bilfinger & Berger 1,309,087 2,450 Brau und Brunnen * 204,626 11,100 Bremer Vulkan Verbund AG * 12,821 621,400 Continental AG 12,109,975 48,550 Deutsche Babcock & Wilcox * 2,185,642 6,750 Didier-Werke AG 551,771 6,950 DLW AG * 574,295 250,400 Douglas Holdings AG 8,825,258 21,790 Draegerwerk AG Preferred 311,064 300 Escada AG 56,154 1,000 Escada AG Preferred (Non Voting) 1.43% 171,188 684,905 FAG Kugelfischer 10,467,095 83,900 Fresenius AG Preferred 18,090,037 42,000 Friedrich Krupp AG 6,712,238 870 GEA AG Preferred 3.13% 297,868 10,487 Hamburgische Electricitaets-Werke AG 2,994,156 89,000 Henkel KGAA Preferred 4,744,699 140,000 Hochtief AG 6,095,249 1,450 Horten AG 188,959 4,000 Kaufhalle AG * 405,165 465,073 Klockner Humboldt Deutz * 2,314,070 31,150 Klockner-Werke AG * 1,955,870 29,250 Kolbenschmidt * 466,073 26,870 Leirheit AG 891,316 763,150 Lufthansa AG 10,125,909 19,950 MAN AG 5,099,174 4,350 MAN AG Preferred 926,327 606,450 Metallgesellschaft * 12,928,643 11,950 Pfaff (GM) AG * 258,367 400 Philips Kommunikations Industrie AG 121,076 30,000 Phoenix AG 438,929 12,868 Porsche AG Preferred (Non Voting) 14,482,407 20,850 Preussag AG 5,353,912 59,650 Puma AG Preferred 2,084,676 4,070 Rheinmetall Berlin AG 671,422 1,670 Rheinmetall Berlin AG Preferred (Non Voting) 5.60% 224,751 3,250 Rosenthal AG * 248,341 331,700 RWE Preferred 12,054,138 850 Salamander AG 100,699 234,359 Schering AG 21,253,621 200 Schmalbach-Lubeca 40,990 131,750 Schwarz Pharma AG 9,833,254
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 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------ Germany - continued 195,200 Siemens AG 9,868,689 427,492 SKW Trostberg AG 13,015,691 1,050 Strabag Bau AG Preferred 95,161 3,550 Strabag Bau AG * 308,485 80,200 Thyssen AG 17,011,977 920 Varta AG * 152,589 60,800 Veba AG 3,479,019 64,150 Viag AG 28,328,293 2,050 Villeroy and Boch AG 276,863 1,975 Volkswagen AG Preferred .79% 752,236 1,750 Zanders Feinpapiere * 112,990 ----------------- 381,227,017 ----------------- Hong Kong - 9.9% 20,561,000 Allied Properties Ltd 3,770,225 9,421,500 Amoy Properties Ltd 11,253,729 1,154,000 ASM Pacific Technology 961,170 14,119,000 Cathay Pacific Airways Ltd 21,969,777 1,282,000 Century City International 455,256 5,984,000 Champion Technology Holdings 904,091 1,196,800 Champion Technology Holdings Warrants 6/30/98 * 72,636 3,484,000 Cheung Kong Holdings 33,179,881 709,000 China Light & Power Co 3,277,660 10,800,000 China Overseas Land & Investment Ltd 6,310,692 2,104,000 Chinese Estates Holdings Ltd 2,241,477 2,692,000 CP Pokphand Co * 973,347 39,000 Cross Harbour Tunnel Co Ltd 85,363 108,800 Dah Sing Financial Services 455,207 3,962,352 Dairy Farm International 3,070,823 334,000 Dao Heng Bank 1,716,581 3,276,000 Denway Investments * 283,435 529,200 Dickson Concept International Ltd 1,930,514 8,215,000 Elec & Eltek International Holdings Ltd 2,100,426 658,105 First Sign International Holdings 174,214 1,846,000 FPB Bank Holding Co 852,202 266,100 Furama Hotel Enterprises Ltd 446,707 2,159,000 Gold Peak Industry 1,407,922 758,000 Goldlion Holdings Ltd 675,387 3,624,739 Great Eagle Holdings Ltd 13,597,452 4,365,000 Guangzhou Investment Co 2,212,374 344,000 Guoco Group 1,923,450 12,273,300 Hang Lung Development Co Ltd 24,724,106 1,179,400 Hang Seng Bank 13,630,721 219,000 Harbour Centre Development Ltd 323,806 16,138,000 Henderson Investment Ltd 18,130,243 3,913,000 Henderson Land Development Co Ltd 34,991,639
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 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------ Hong Kong - continued 1,116,000 HKCB Bank Holding Co Ltd 374,690 2,250,000 HKR International Ltd 3,399,406 2,358,400 Hon Kwok Land Investment 860,341 1,422,700 Hong Kong Ferry Co Ltd 2,709,817 2,814,186 Hong Kong Land Holdings 8,020,430 1,586,100 Hongkong Aircraft Engineering Co Ltd 5,028,248 676,000 Hongkong and Shanghai Hotels Ltd Preferred 1.95% 1,191,555 5,735,300 Hongkong Electric Holdings Ltd 19,848,404 3,115,000 Hysan Development Co Ltd 10,921,003 484,000 Innovative International 201,563 320,574 Jardine Strategic Warrants 5/02/98 * 108,995 168,000 Johnson Electric Holdings Ltd 464,256 530,840 Kantone Holdings Ltd * 78,831 4,078,000 Kumagai Gumi Hong Kong Ltd 4,660,421 3,120,800 Lai Sun Development 4,674,752 1,864,000 Lai Sun Garment International Ltd 2,719,938 165,000 Lane Crawford International Ltd Class B 19,602 206,000 Laws International Holdings Ltd 31,921 1,586,000 Leading Spirit Holdings 372,743 1,027,000 Liu Chong Hing Bank Ltd 1,949,496 1,608,000 Liu Chong Hing Investment Ltd 2,003,771 1,109,398 Mandarin Oriental 1,508,781 36,000 National Mutual Asia Ltd 39,282 1,384,000 New Asia Realty & Trust A Shares 5,030,940 4,314,743 New World Development Co Ltd 26,744,275 5,650,000 Oriental Press Group 2,352,951 711,200 Oriental Press Group Warrants 10/2/98 * 38,113 4,128,000 Paul Y- ITC Construction Holdings Ltd 948,843 313,000 Peregrine Investments Holdings 571,920 1,326,000 Playmate Toys Holding 325,336 164,000 Realty Development Corp Ltd Class A 632,154 35,042,913 Regal Hotels International Ltd 10,407,890 282,800 San Miguel Brewery Ltd 118,685 1,365,000 Shaw Brothers Ltd 1,559,950 1,769,000 Shell Electric Co Ltd 1,153,596 8,634,000 Shun Tak Holdings Ltd 6,132,102 656,000 Sino Land Co Ltd 753,926 10,442,000 South China Morning Post Ltd 9,371,371 1,184,000 Sun Hung Kai Properties Ltd 13,722,107 5,273,000 Sun Hung Kai & Co Ltd 1,395,874 1,145,800 Sun Hung Kai & Co Ltd Warrants 2/18/00 * 99,133 4,404,500 Swire Pacific Ltd Class B 6,000,449 3,390,707 Tai Cheung Holdings Ltd 3,064,947 974,000 Tem Fat Hing Fung 311,293 708,000 Texwinca Holdings Ltd 539,411
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 28, 1997
Shares Description Value ($) - --------------------------------------------------------------------------------------------------- Hong Kong - continued 24,000 Union Bank of Hong Kong 37,190 3,885,000 Wharf Holdings Ltd 17,257,748 9,583,000 Wheelock & Co Ltd 25,801,337 359,100 Wing Lung Bank 2,562,019 218,500 Winsor Industrial Corp Ltd 53,327 531,000 Winsor Properties Holdings Ltd * 983,968 5,994,000 World Trade Centre Group Ltd 1,176,508 4,678,000 Yizheng Chemical Fibre Co 1,093,386 4,618,000 Yue Yuen Industrial Holding 1,878,448 --------------- 421,409,956 --------------- Italy - 4.6% 3,049,300 Alitalia Linee Aeree Italiane Class A * 1,100,635 219,500 Alleanza Assicurazioni SPA 1,580,660 371,000 Ansaldo Transporti SPA * 381,976 19,000 Assicurazioni di Milano 52,840 599,750 Assicurazioni Generali SPA 10,894,867 3,430,500 Autostrade Concessioni e Costruzioni SPA Class B Preferred 6.39% 7,084,287 1,031,000 Banca Commerciale Italiana SPA 2,086,402 174,000 Banca Commerciale Italiana SPA (Non Convertible) 389,183 5,569,300 Banca di Roma * 4,089,646 1,511,500 Banca Fideuram SPA 3,810,053 131,716 Banca Nazionale dell'Agricoltura SPA (Non Convertible) 50,660 44,000 Banca Nazionale dell'Agricoltura * 30,331 44,300 Banca Popolare di Bergamo Credit 657,947 244,000 Banca Popolare di Milano 1,335,503 217,200 Banca Toscana 411,266 249,000 Banco Ambrosiano Veneto SPA (Non Convertible) 458,219 136,000 Banco Ambrosiano Veneto SPA 346,036 1,845,268 Banco di Napoli di Risp * 829,825 550,000 Bastogi-IRBS SPA * 20,991 220,100 Benetton Group SPA 2,525,289 754,300 Cartiere Burgo SPA 3,459,068 446,000 Cementir Cementerie del Tirreno SPA 286,337 1,587,800 Cia Italiana del Grandi Alberghi Cigahotels SPA * 740,347 615,300 COFIDE SPA (Non Convertible) * 160,196 1,192,243 COFIDE SPA * 500,883 333,000 Cogefar Impresit Costruzioni Generali SPA * 248,469 180,750 Comau Finanziaria SPA 550,806 335,000 Compart SA * 147,678 1,580,500 Credito Italiano (Non Convertible) 2,020,047 987,500 Credito Italiano 1,349,778 2,907,200 Dalmine SPA * 643,369 25,600 Danieli and Co SPA 187,001 757,900 Edison SPA 4,166,208 69,500 Editoriale L'Espresso SPA 234,408 10,250 Ericsson SPA 131,612
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Italy - continued 515,600 Falck Acciaierie and Ferriere Lombarde 2,286,640 669,000 Fiat SPA 2,066,379 898,000 Fiat SPA Preferred 1,509,065 2,267,200 Fiat SPA (Non Convertible) 3,836,800 173,500 Finmeccanica SPA (Non Convertible) * 68,784 290,944 Finmeccanica SPA * 129,289 114,750 Fondiaria SPA 440,667 6,768,700 Gemina * 3,840,937 627,440 Gilardini SPA 840,918 588,000 Grassetto SPA (b) * 3 1,243,500 IFI Istituto Finanziario Preferred 2.46% 15,267,825 438,100 IFIL Finanziaria di Partecipazioni SPA 1,309,115 1,367,400 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 2,629,615 1,607,000 Industriali Riunite SPA (Non Convertible) * 658,014 1,407,850 Industriali Riunite SPA * 936,345 331,500 Istituto Bancario San Paolo 2,351,885 497,500 Istituto Mobilaire Italiano 4,345,030 7,965,299 Istituto Nazionale Delle Assicurazioni 10,416,160 81,350 Italcementi Fabbriche Riunite Cemento SPA 441,649 255,650 Italcementi Fabbriche Riunite Cemento SPA (Non Convertible) 621,729 187,300 Italgas SPA 667,741 11,000 Italmobiliare SPA 173,136 87,800 Luxottica Group Sponsored ADR 5,114,350 373,000 Mediobanco SPA 2,435,536 231,508 Mondadori Editore 1,513,706 880,000 Montedison SPA (Non Convertible) * 593,609 9,984,798 Montedison SPA * 7,207,961 440,342 Montefibre SPA 270,719 75,000 Olivetti and Co SPA Preferred * 68,787 11,264,150 Olivetti and Co SPA * 4,132,410 10,670,880 Parmalat Finanziaria SPA 14,680,353 1,056,786 Permafin Finanziaria * 312,659 1,586,575 Pirelli and Co 2,224,960 67,500 Pirelli and Co (Non Convertible) 82,877 212,200 Pirelli SPA (Non Convertible) 327,717 211,000 RAS SPA 1,902,746 112,750 RAS SPA (Non Convertible) 610,451 109,200 Rinascente per l'Esercizio di Grandi Magazzini SPA 547,292 406,000 Rinascente per l'Esercizio di Grandi Magazzini SPA Preferred 5.59% 804,793 270,600 Rinascente per l'Esercizio di Grandi Magazzini SPA (Non Convertible) 658,887 235,500 SAFFA SPA * 565,757 36,612 SAFILO SPA 608,756 45,500 SAI 380,962 161,400 Saipem SPA 736,805 146,000 Sasib SPA 431,953
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------- Italy - continued 158,200 Sasib SPA (Non Convertible) 309,847 1,496,592 SMI (Societa Metallurgica Italy) * 666,825 162,700 Snia BPD SPA 162,315 205,000 Sopaf SPA 230,473 400,600 Stefanel SPA * 359,118 872,500 STET di Risp (Non Convertible) 3,051,169 2,700,000 Telecom Italia Mobile SPA (Non Convertible) 4,129,882 5,307,500 Telecom Italia Mobile SPA 13,896,857 2,953,300 Telecom Italia RNC 5,941,550 4,531,900 Telecom Italia SPA 10,645,943 35,000 Toro Assicurazioni 434,911 ------------------ 193,843,485 ------------------ Japan - 13.7% 54,000 77th Bank 440,716 207,000 Advantest Corp 11,697,241 115,000 Aisin Seiki Co Ltd 1,610,324 27,000 Aiwa Co 503,356 64,000 Alps Electric Co Ltd 678,764 453,000 Amada Co Ltd 3,306,761 1,711,000 Aoki Corp * 2,466,766 33,000 Aoki International 601,541 70,000 Aoyama Trading 1,757,395 17,300 Arabian Oil Co Ltd 551,868 245,000 Asahi Breweries Ltd 2,375,093 38,000 Asahi Optical Co 159,002 316,000 Ashikaga Bank Ltd 1,055,166 59,000 Asics Corp * 118,792 13,000 Autobacs Seven 916,646 29,000 Bandai Co 598,310 281,000 Bank of Yokohama Ltd 1,345,745 66,000 Banyu Pharmaceutical Co Ltd 962,466 14,000 Best Denki Co Ltd 149,640 84,700 Canon Sales Co Inc 1,642,207 66,000 Chiyoda Corp * 349,988 116,200 Chubu Electric Power Co Inc 2,050,758 7,000 Chudenko Corp 200,099 240,000 Chugai Pharmaceutical Co Ltd 1,895,103 43,500 Chugoku Electric Power Co Inc 753,294 654,000 Cosmo Oil Co Ltd 2,546,856 78,000 Credit Saison Co 1,660,950 237,800 CSK Corp 5,654,868 851,000 Daicel Chemical Industries Ltd 3,666,584 98,000 Daido Steel Co Ltd 297,191 181,000 Daiei Inc 1,196,769 209,000 Daiichi Seiyaku Co Ltd 3,411,467
14 See accompanying notes to the financial statements. GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ----------------------------------------------------------------------------------------------- Japan - continued 65,000 Daikin Industries Ltd 509,487 96,000 Daikyo Inc 361,919 477,000 Dainippon Printing Co Ltd 7,944,072 410,000 Dainippon Screen Manufacturing Co Ltd 3,308,808 45,000 Daishowa Paper Manufacturing * 180,835 71,200 Daito Trust Construction Co Ltd 696,131 82,000 Daiwa House Industry Co Ltd 910,432 1,100 Denny's Japan Co Ltd 28,254 211,000 Denso Corp 4,056,011 16,000 Dowa Mining Co 56,078 1,129 East Japan Railway Co 4,808,236 152,000 Eisai Co Ltd 2,846,300 81,300 Fanuc Co 2,526,100 415,000 Fuji Heavy Industries Ltd 1,977,173 274,000 Fuji Photo Film Co Ltd 9,171,928 414,000 Fujikara Ltd 3,245,041 783,000 Fujisawa Pharmaceutical Co Ltd 6,812,081 12,000 Fujita Kanko Inc 132,240 44,000 Fujitec Co 404,673 1,565,000 Fujitsu Ltd 15,430,856 40,000 Furukawa Electric Co Ltd 185,931 292,000 Gakken Co Ltd 1,318,585 58,000 General Sekiyu (KK) 350,816 140,000 Green Cross Corp 579,998 705,000 Hankyu Corp 3,382,177 38,000 Hanwa Co Ltd * 102,958 1,040,000 Haseko Corp * 2,016,406 41,000 Heiwa Corp 567,321 17,000 Higo Bank Ltd 95,783 22,000 Hirose Electric 1,232,248 13,000 Hitachi Chemical Co 97,050 1,760,300 Hitachi Ltd 15,168,713 29,000 Hitachi Maxell Ltd 581,490 112,000 Hitachi Metals Ltd 779,518 51,300 Hokkaido Electric Power 875,615 107,000 Honda Motor Co Ltd 3,306,902 45,000 Hosiden Corp * 309,843 25,000 House Foods Corp 347,999 165,000 Hoya Corp 7,027,094 6,000 Hyogo Bank Ltd (b) * 1 259,000 INAX Corp 1,706,065 392,000 Industrial Bank of Japan 4,677,107 23,000 Intec Inc 272,516 108,000 Ishihara Sangyo Kaisha * 249,664 74,000 Isuzu Motors Ltd 334,162
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 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------- Japan - continued 119,000 Ito-Yokado 5,403,265 33,000 Japan Airlines Co * 136,987 10,000 Japan Airport Terminal Co Ltd 101,914 41,000 Japan Aviation Electronics 239,838 114,000 Japan Metals & Chemicals * 290,927 94,000 Japan Radio Co 903,472 724,000 Japan Synthetic Rubber Co Ltd 5,135,007 832 Japan Tobacco Inc 5,583,893 136,000 JGC Corp 776,402 170,000 Joshin Denki Co Ltd 1,535,338 47,000 Kaken Pharmaceutical Co Ltd 242,613 148,000 Kamigumi Co Ltd 779,915 50,000 Kandenko Co 422,570 229,000 Kanebo Ltd * 396,561 89,000 Kaneka Corp 446,880 32,000 Kankaku Securities Co Ltd * 63,104 109,200 Kansai Electric Power 1,981,506 79,000 Kansai Paint Co Ltd 326,630 233,000 Kao Corp 2,548,347 29,000 Katokichi Co Ltd 466,153 89,000 Kawasaki Heavy Industry 368,713 329,000 Keihin Electric Express Railway Co Ltd 1,420,242 118,000 Kenwood Corp * 503,521 14,000 Keyence Corp 1,705,195 67,000 Kinden Corp 871,572 1,028,000 Kinki Nippon Railway Co Ltd 6,175,325 270,000 Kirin Brewery Co Ltd 2,304,251 26,000 Kissei Pharmaceutical Co Ltd 519,181 53,000 Kokusai Electric 821,195 195,000 Kokusai Kogyo Co Ltd 1,615,710 93,000 Kokuyo Co Ltd 1,988,069 51,000 Komori Corp 1,064,877 31,000 Konami Co Ltd 888,723 62,000 Koyo Seiko Co Ltd 460,800 226,000 Kubota Corp 1,028,039 618,000 Kurabo Industries Ltd 1,546,408 48,000 Kurita Water Industries Ltd 1,014,169 104,000 Kyocera Corp 6,161,240 79,000 Kyowa Exeo Corp 621,187 96,000 Kyowa Hakko Kogyo Co Ltd 637,136 30,000 Kyudenko Corp 228,685 101,100 Kyushu Electric Power Co Inc 1,750,758 500 Long Term Credit Bank of Japan 1,802 18,000 Mabuchi Motor Co 896,346 99,000 Maeda Corp 601,268
16 See accompanying notes to the financial statements. GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - --------------------------------------------------------------------------------------------- Japan - continued 62,000 Maeda Road Construction 529,124 60,000 Makino Milling Machine Co Ltd 421,079 26,000 Makita Corp 357,610 25,000 Marudai Food Co Ltd 107,714 534,000 Marui Co Ltd 7,654,487 40,000 Maruichi Steel Tube 626,398 117,000 Matsushita Communications 3,073,080 768,000 Matsushita Electric Industrial Co Ltd 11,835,943 568,000 Matsushita Electric Works Ltd 4,988,649 70,000 Matsushita Kotubuki 2,000,994 954,000 Mazda Motor Corp * 2,782,401 78,000 Meiji Milk Products Co Ltd 347,701 633,000 Minebea Co Ltd 5,234,352 134,000 Minolta Co Ltd 827,160 55,000 Misawa Homes 335,405 345,000 Mitsubishi Corp 3,201,591 628,000 Mitsubishi Electric Corp 3,527,914 675,000 Mitsubishi Gas Chemical Co Inc 2,472,036 406,000 Mitsubishi Materials Corp 1,507,068 276,000 Mitsubishi Oil Co Ltd 1,147,999 153,000 Mitsubishi Paper Mills Ltd 567,934 131,000 Mitsubishi Rayon Co Ltd 475,416 130,000 Mitsubishi Steel Manufacturing * 447,013 1,931,000 Mitsui Engineering & Shipbuilding * 3,631,925 125,000 Mitsui Fudosan Co Ltd 1,356,782 406,000 Mitsui Mining & Smelting Co Ltd 1,560,892 270,000 Mitsui OSK Lines * 536,913 160,000 Mitsui Petrochemical Industries Ltd 734,444 39,000 Mochida Pharmaceutical Co Ltd 326,373 3,000 Mori Seiki Co Ltd 40,268 92,000 Murata Manufacturing Co Ltd 3,224,459 69,000 Nachi Fujikoshi Co 206,960 9,000 Nagase & Co 59,135 130,000 Nagoya Railroad Co Ltd 480,404 16,400 Namco Ltd 463,369 102,000 National House Industrial 1,233,905 825,000 NEC Corp 9,569,973 87,000 New Japan Securities Co Ltd * 267,437 381,000 New Oji Paper Co Ltd 2,121,402 51,000 NGK Insulators 464,827 180,000 NGK Spark Plug Co 1,849,366 9,000 NHK Spring Co Ltd 32,066 103,000 Nichicon Corp 1,186,262 241,000 Nichii Co Ltd 3,095,120 58,000 Nihon Cement Co Ltd 276,328
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 28, 1997
Shares Description Value ($) - --------------------------------------------------------------------------------------------------- Japan - continued 244,000 Nikon Corp 3,578,424 167,400 Nintendo Co Ltd 11,803,579 2,000 Nippon Beet Sugar Manufacturing Co Ltd 6,745 440,000 Nippon Carbon Co Ltd * 1,221,311 66,000 Nippon Chemical 432,563 15,000 Nippon Comsys 165,300 48,000 Nippon Electric Glass Co 660,204 404,000 Nippon Express Co Ltd 2,600,945 36,000 Nippon Hodo Co 291,126 157,000 Nippon Light Metal 558,066 60,000 Nippon Meat Packers Inc 601,541 4,147,000 Nippon Oil Co Ltd 17,489,626 237,000 Nippon Paper Industries 1,111,459 13,000 Nippon Shinpan Co Ltd 54,934 96,000 Nippon Shokubai Corp 612,478 231,000 Nippon Soda Chemical Co Ltd 1,684,315 32,000 Nippon Suisan Kaisha Ltd * 85,111 4,364 Nippon Telegraph & Telephone 31,060,370 5,000 Nippon Television Network 1,487,281 44,000 Nippon Yusen (KK) 171,348 241,000 Nishimatsu Construction 1,797,166 1,401,000 Nissan Motor Co Ltd 8,265,076 458,000 Nisshinbo Industries Inc 3,301,516 472,000 Nissho Iwai Corp 1,779,435 27,000 Nissin Food Products Co Ltd 516,779 150,000 Nitto Boseki Co Ltd 461,099 395,000 Nitto Denko Corp 5,269,285 470,000 Odakyu Electric Railway Co Ltd 2,418,345 656,000 Oki Electric Industry 3,456,923 122,000 Okumura Corp 644,925 82,000 Olympus Optical Co Ltd 686,221 134,000 Omron Corp 2,109,537 118,000 Ono Pharmaceutical Co Ltd 3,793,521 19,000 Onoda Cement Co Ltd 66,750 4,000 Onward Kashiyama Co Ltd 49,051 30,000 Orient Corp 133,980 270,000 Pioneer Electronics Corp 5,212,528 1,000 Rasa Industries Ltd 5,344 1,078,000 Renown Inc * 2,143,674 449,000 Ricoh Co Ltd 5,282,791 6,000 Rinnai Corp 108,377 170,000 Royal Co Ltd 2,873,478 36,000 Sagami Railway Co Ltd 129,754 174,000 Sanden Corp 1,398,459 190,000 Sankyo Co Ltd 5,289,585
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 28, 1997
Shares Description Value ($) - --------------------------------------------------------------------------------------------------- Japan - continued 54,000 Sanrio Co Ltd * 340,045 9,000 Sanwa Shutter Corp 65,101 20,000 Sanyo Securities Co Ltd * 44,908 158,000 Sato Kogyo Co Ltd 353,468 47,500 Secom Co Ltd 2,676,278 101,300 Sega Enterprises 2,836,971 56,000 Seino Transportation Co Ltd 556,798 62,000 Seiyu 534,261 414,000 Sekisui Chemical Co Ltd 4,287,845 154,000 Sekisui House Ltd 1,429,116 84,000 Seven-Eleven Japan 5,052,946 50,000 Shikoku Electric Power 865,855 205,000 Shin-Etsu Chemical Co Ltd 3,957,660 216,000 Shionogi and Co Ltd 1,344,072 241,000 Shiseido Co Ltd 2,815,561 109,000 Shokusan Jutaku Sogo Co Ltd * 183,337 448,000 Showa Denko 983,677 209,000 Showa Line Ltd * 211,269 339,000 Showa Shell Sekiyu 2,530,773 148,000 Skylark Co Ltd 2,133,731 28,000 SMC 1,904,715 110,000 Sony Corp 7,938,520 208,000 Stanley Electric Co Ltd 1,058,182 518,000 Sumitomo Corp 3,892,833 51,000 Sumitomo Electric 705,692 53,000 Sumitomo Forestry Co Ltd 606,015 412,000 Sumitomo Heavy Industries Ltd 1,242,588 34,000 Sumitomo Osaka Cement Co Ltd 92,965 70,000 Sumitomo Rubber Inc 461,099 154,000 Taisho Pharmaceutical Co Ltd 3,547,270 166,000 Taiyo Yuden Co Ltd 1,939,349 62,000 Takara Standard Co 462,855 132,000 Takashimaya Co 1,454,636 257,000 Takeda Chemical Industries Ltd 5,153,202 114,000 Takuma Corp 1,294,059 100,000 Tanabe Seiyaku Co Ltd 724,998 174,000 TDK Corp 11,649,018 218,000 Terumo Corp 3,179,054 86,000 Toda Corp 493,811 3,400 Toho Co Ltd 445,107 82,400 Tohoku Electric Power Co Inc 1,413,274 73,000 Tokyo Broadcasting System Inc 1,058,497 116,000 Tokyo Electric Co Ltd * 422,902 218,700 Tokyo Electric Power 4,059,060 193,000 Tokyo Steel Manufacturing Co 2,126,854 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 28, 1997
Shares Description Value ($) - --------------------------------------------------------------------------------------------------- Japan - continued 51,000 Tokyo Style Co Ltd 583,147 77,000 Tokyo Tatemono Co Ltd 334,949 525,000 Tokyu Construction Co Ltd 1,157,097 100,000 Tokyu Land Corp * 343,856 403,000 Toppan Printing Co Ltd 4,641,395 46,000 Toray Industries Inc 266,037 1,198,000 Toshiba Corp 6,749,855 34,000 Toshiba Tungaloy Co Ltd 152,125 54,000 Tostem Corp 1,252,796 13,000 Toyo Exterior Co Ltd 177,728 66,000 Toyo Seikan Kaisha Ltd 1,547,601 179,000 Toyo Trust & Banking Co Ltd 1,278,465 75,000 Toyoda Auto Loom 1,298,782 154,000 Toyota Motor Corp 3,942,829 51,000 Tsubakimoto Chain 265,797 32,000 Tsumura and Co 198,857 15,000 Unicharm Corp 385,285 61,000 Uniden Corp 657,055 16,000 UNY Co Ltd 282,376 231,000 Wacoal Corp 2,335,073 54,000 Yakult Honsha Co Ltd 545,861 13,000 Yamaguchi Bank Ltd 159,417 168,000 Yamaha Corp 3,201,591 313,000 Yamanouchi Pharmaceutical Co Ltd 6,535,421 197,000 Yamato Transport Co Ltd 1,942,414 38,000 Yamazaki Baking Co Ltd 569,890 93,000 Yodogawa Steel Works 531,693 179,000 Yokogawa Electric Corp 1,371,903 2,000 Yoshitomi Pharmaceutical Industries Ltd 13,622 ------------------ 583,881,224 ------------------ Malaysia - 4.6% 201,000 Aluminum Co Malaysia 322,183 1,051,000 Amalgamated Steel Mills Berhad 931,212 2,016,596 Amcol Holdings Ltd (c) 1,909,120 478,200 AMMB Holdings Berhad 4,506,597 455,000 Aokam Perdana Berhad * 980,366 312,000 Arab Malaysian Finance (Foreign Registered) 2,173,822 42,000 Ayer Hitam Tin Dredging * 95,570 2,028,000 Berjaya Group 2,825,969 1,166,000 Berjaya Industrial Berhad 1,868,981 1,078,000 Berjaya Leisure Berhad 3,017,358 884,000 Berjaya Sports Toto 5,126,702 109,000 Carlsberg Brew Malaysia 939,428 274,000 Cement Industries of Malaysia Berhad 833,145 182,000 DMIB Berhad 216,963
20 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 28, 1997
Shares Description Value ($) - --------------------------------------------------------------------------------------------------- Malaysia - continued 687,000 Edaran Otomobil Berhad 7,055,377 359,000 Ekran Berhad 1,286,790 203,000 Esso Malaysia Berhad 560,028 266,000 Faber Group Berhad * 340,669 355,000 Genting Berhad 2,416,230 550,000 Golden Hope Plantations Berhad 992,348 186,000 Golden Plus Holdings 479,420 208,000 Guinness Anchor Berhad 536,126 240,000 Highlands and Lowlands Berhad 429,158 194,600 Hong Leong Industries Berhad 666,170 18,800 Hong Leong Industries Berhad Class A 64,358 607,000 Hong Leong Properties Berhad 1,124,527 170,000 Hume Industries Berhad 1,074,909 832,000 IJM Corp Berhad Class A 2,228,272 228,000 Innovest Berhad 867,741 1,273,000 IOI Corporation Berhad 2,296,834 307,000 Jaya Tiasa Holdings Berhad 1,681,514 390,000 Johan Holdings Berhad 420,942 697,000 Kedah Cement Berhad 1,353,006 148,000 Kelanamas Industries 312,928 419,000 Kemayan Corporation Berhad 631,116 192,000 Kian Joo Can Factory 904,712 36,000 Kuala Lumpur Kepong Berhad 108,739 1,147,000 Kuala Lumpur Kepong Berhad (Singapore) 3,378,261 947,000 Kumpulan Guthrie Berhad 1,647,620 814,000 Land & General Berhad 1,655,538 533,000 Landmark Berhad 957,382 890,000 Leader Universal Holdings 1,899,718 2,058,000 Magnum Corp Berhad 4,268,506 364,000 Malayan Cement Berhad 952,880 1,917,000 Malayan United Industries Berhad 1,752,553 264,000 Malayawata Steel 520,983 1,231,000 Malaysian Airline Systems 3,272,090 988,000 Malaysian Helicopter Berhad 1,400,628 782,000 Malaysian International Ship (Alien Market) 2,062,868 346,000 Malaysian Mosaics 601,981 120,000 Malaysian Oxygen Berhad 647,604 266,000 Malaysian Pacific Industries 1,103,423 272,000 Malaysian Plantations Rights 4/9/97 * 118,309 408,000 Malaysian Plantations 961,257 310,000 Malaysian Resources Corp 1,310,914 47,000 Matsushita Electric 459,968 1,780,000 MBF Capital Berhad 3,656,061 2,717,000 MBF Holdings Berhad 1,805,497 1,178,000 Metroplex Berhad 1,603,560 See accompanying notes to the financial statements 21
GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------- Malaysia - continued 805,000 Mulpha International 875,352 1,106,000 Multi Purpose Holdings 2,628,031 161,000 Nestle Malaysia 1,225,493 311,000 New Straits Times 1,978,977 773,600 Oriental Holdings Berhad 6,978,913 172,000 OYL Industries Berhad 1,676,359 1,116,000 Pan Malaysia Cement 1,330,391 670,500 Perlis Plantations 2,079,279 897,000 Pernas International Hotel & Property 1,105,445 2,209,000 Perusahaan Otomobil 14,590,254 291,000 Petaling Garden Berhad 496,915 447,000 Petronas Dagangan Berhad 1,197,161 299,000 Petronas Gas Berhad 1,089,791 257,000 Pilecon Engineering Berhad 465,767 326,000 PJ Development Holdings 376,810 678,000 Promet Berhad * 767,290 2,870,000 Public Bank Berhad (Alien Market) 6,703,987 3,277,000 Renong Berhad 5,965,381 653,000 Resorts World Berhad 3,050,665 285,000 RJ Reynolds Berhad 780,507 54,000 Rothmans of Pall Mall Malaysia Berhad 560,008 1,689,000 Sarawak Enterprises Corp 3,224,269 338,000 Shell Refinery Co 1,089,005 234,000 Sime Darby 270,442 950,000 Sime Darby Berhad 3,596,456 60,000 Sime UEP Properties Berhad 161,901 224,000 Sistem Television Malaysia 460,089 345,000 Sungei Way Holdings 1,000,403 974,000 TA Enterprise Berhad 1,545,534 3,214,000 Tan Chong Motor Holdings Berhad 6,536,730 650,000 Technology Resources Industries 1,518,325 772,000 Telekom Malaysia 6,249,376 2,016,000 Tenaga Nasional 9,661,861 635,000 Time Engineering Berhad 1,432,139 235,000 Tractors Malaysia Holdings Berhad 492,147 1,196,000 UMW Holdings Berhad 6,309,948 177,000 Uniphone Telecommunications 246,645 523,000 Westmont Industries Berhad 1,063,693 711,000 YTL Corp 4,123,399 --------------- 194,522,069 --------------- Netherlands - 0.1% 5,200 ACF Holding NV 83,526 850 Cap Volmac Group NV 28,426 41,470 Elsevier NV 663,939 4,200 Fortis Amev NV 161,470
22 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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------- Netherlands - continued 4,100 Getronics NV 133,874 1,500 Gist Brocades NV 50,795 18,300 ING Groep NV 708,368 1,000 Internatio-Muller 30,230 2,900 KLM Ltd 88,888 4,823 Kon Bolswessanen 84,583 4,000 Koninklijke KNP BT 91,426 1,266 Koninklijke Pakhoed 39,671 11,400 Schroders International Property Fund 23,449 2,200 Telegraaf Holdings CVA 48,431 10,940 VNU 226,428 --------------- 2,463,504 --------------- New Zealand - 0.1% 482,442 Fletcher Challenge Energy 1,238,225 1,839,929 Lion Nathan Ltd 4,531,392 23,697 Trans Tasman Properties 12,131 --------------- 5,781,748 --------------- Norway - 1.6% 202,555 Bergesen D Y AS Class A 4,208,248 56,300 Dyno Industrier AS 1,336,776 31,250 Elkem AS Class A 500,846 78,940 Kvaerner Industrier AS 3,877,532 182,574 Leif Hoegh and Co AS 3,522,189 832,290 Norsk Hydro AS 41,684,901 98,144 Nycomed ASA B Shares 1,456,445 87,390 Orkla-Borregaard AS Class A 6,964,122 236,634 SAS Norge ASA Class B 2,352,785 121,210 Unitor AS 1,564,905 --------------- 67,468,749 --------------- Singapore - 2.7% 2,719,852 Chuan Hup Holdings Ltd 2,098,063 3,581,096 DBS Land Ltd 13,937,646 198,200 Faber Group Berhad * 247,403 1,109,309 First Capital Corp Ltd 3,329,483 1,365,577 Fraser and Neave Ltd 12,257,634 8,000 Golden Hope Plantations Berhad 14,530 75,000 Goodman Fielder Asia Holdings Ltd 129,909 3,550,936 Hai Sun Hup Group Ltd 2,639,546 1,393,351 Haw Par Brothers International Ltd 3,243,987 139,335 Haw Par Brothers International Ltd Warrants 7/18/2001 * 134,840 785,000 Highlands and Lowlands Berhad 1,425,771 2,511,104 Hotel Properties Ltd 4,437,575 584,708 Inchcape Berhad 2,041,968 2,480,621 Jardine Matheson Holdings Ltd 15,007,757 5,529,521 Jardine Strategic Holdings Ltd 18,136,829
See accompanying notes to the financial statements 23 GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------- Singapore - continued 583,712 Jurong Shipyard Ltd 2,783,479 1,281,849 Lum Chang Holdings Ltd 1,204,543 980,000 Malaysia Mining Corp Berhad 1,340,112 1,000 Marco Polo Developments Ltd 2,272 565,000 Metro Holdings Ltd 1,846,353 4,519,556 Neptune Orient Lines Ltd 3,898,355 259,200 Prima Ltd 901,565 448,424 Robinson and Co Ltd 1,839,608 249,651 Shangri-La Hotel Ltd 787,819 316,712 Singapore Land Ltd 1,787,890 2,315,168 Straits Trading Co Ltd 5,714,861 392,036 Times Publishing Ltd 874,246 264,000 United Engineers 457,279 9,447,960 United Industrial Corp Ltd 8,149,362 1,361,116 United Overseas Land Ltd 2,176,258 570,300 Wearne Brothers Ltd 1,559,727 --------------- 114,406,670 --------------- Spain - 3.5% 341,678 Argentaria Corporacion Bancaria de Espana SA 13,681,421 13,570 Azucarera de Espana SA 639,925 626,979 Banco Bilbao Vizcaya SA 36,958,302 307,004 Banco Central Hispanoamericano SA 8,138,230 9,300 Banco Zaragozano SA 188,141 1,100 Bodegas Y Bebidas SA 30,195 11,959 Cristaleria Espanola SA 993,594 212,055 Dragados y Construcciones SA 3,210,041 83,715 Empresa Nacional de Electricidad SA 5,109,915 180,525 Ercros SA * 117,118 8,573 Fabricacion de Automoviles Renault de Espana SA 164,463 2,231,326 FENOSA SA 17,666,934 747,654 Fuerzas Electricas de Cataluna SA 5,971,844 38,886 Grupo Duro Felguera SA * 394,692 1,373,280 Iberdrola SA 14,992,558 366,774 Repsol SA 13,944,320 132,610 Sarrio SA 481,966 605,519 Sevillana de Electricidad 5,491,278 111,886 Tabacalera SA Class A 5,065,505 79,001 Tableros Defibras Class B 763,281 552,904 Telefonica de Espana SA 12,728,170 4,800 Telefonica de Espana SA ADR 330,600 180,175 Uralita SA 1,414,000 --------------- 148,476,493 --------------- Sweden - 4.4% 76,977 Assi Doman 1,996,776 48,600 Autoliv AB 2,210,240 148,000 Avesta Sheffield AB 1,500,113 470,000 Bilspedition AB Class B * 1,748,843
24 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 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------- Sweden - continued 139,967 Celsius Industrier AB Class B 2,697,381 4,103 Custos AB Series Class A 95,214 28,100 Custos AB Series Class B 650,211 6,346 Diligentia AB * 84,212 333,020 Electrolux AB Class B 20,830,128 461,700 Ericsson LM Class B 14,685,780 81,100 Esselte AB Class A 1,963,117 58,200 Esselte AB Class B 1,412,678 37,640 Euroc Industri AB Class A 1,400,563 43,200 Hennes and Mauritz AB Class B 6,141,716 20,303 Industrivarden AB Class A 1,020,823 3,378 Industrivarden AB Class C (Bearer) 162,185 74,200 Kinnevik Investment Class B 2,102,866 130,820 Marieberg Tidnings AB Class A 3,628,994 552,200 Mo Och Domsjo AB Class B 17,527,587 161,800 Nordbanken 5,869,434 1,400 Perstorp AB Class B 25,206 7,800 Securitas AB 223,657 22,600 Skandia Group Foersaekrings AB 687,214 933,460 Skandinaviska Enskilda Banken Class A 9,834,937 524,540 Skanska AB Class B 23,155,565 59,020 SKF AB Class B 1,408,968 476,700 Sparbanken Sverige AB Class A 9,409,264 223,600 Ssab Swedish Steel Class A 3,802,163 78,900 Ssab Swedish Steel Class B 1,341,640 161,388 Stena Line AB Class B 766,249 969,900 Stora Kopparberg Bergslags Class A 13,258,659 243,700 Stora Kopparberg Bergslags Class B 3,298,909 715,472 Svenska Cellulosa Class B 15,887,503 183,600 Svenska Handelsbanken Class A 5,142,103 4,400 Svenska Handelsbanken Class B 117,950 17,200 Svenska Kullagerfabriken AB 406,023 4,486 Sydkraft AB Class A 101,708 11,977 Sydkraft AB Class C 233,211 346,700 Trelleborg AB Class B 5,433,010 41,382 Trygg Hansa Holdings AB Class B 872,002 22,200 Volvo AB Class A 552,180 100,850 Volvo AB Class B 2,528,614 --------------- 186,215,596 --------------- Switzerland - 0.9% 2,875 Adia SA (Bearer) 931,695 1,355 Bobst SA (Bearer) 1,833,614 1,553 Bobst SA (Registered) 968,651 879 Danzas Holding AG (Registered) 941,573 3,747 Elektrowatt AG (Bearer) 1,348,920 410 Fischer (George) AG (Bearer) 418,339 350 Fischer (George) AG (Registered) 67,390
See accompanying notes to the financial statments. 25 GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------- Switzerland - continued 850 Forbo Holdings AG (Registered) 344,034 285 Helvetia Patria Holding * 107,817 296 Hero AG (Bearer) 136,461 4,600 Hilti AG, Schaan (Participating Certificate) 2,900,339 3,604 Holderbank Financiere Glarus AG (Bearer) 2,682,842 16,160 Holderbank Financiere Glarus AG (Registered) 2,421,261 6,720 Interdiscount Holdings (Bearer) * 74,717 460 Kuoni Reisen Holdings AG (Registered) 1,210,034 770 Magazine zum Globus (Registered) 375,864 6,926 Merkur Holding AG (Registered) 1,460,329 3,758 Novartis AG (Bearer) 4,300,681 3,758 Novartis Rights 3/12/97 * 237,837 980 Pargesa Holding SA (Bearer) 996,610 650 Saurer Group Holdings (Registered) 308,475 1,649 Schindler Holding AG (Participating Certificate) 1,844,644 1,558 Schindler Holding AG (Registered) 1,658,346 2,376 Sika Finanz AG (Bearer) 589,570 3,983 SMH AG (Bearer) 2,268,285 17,092 SMH AG (Registered) 2,250,929 700 Societe Generale de Surveillance Holdings Ltd (Registered) 291,864 2,115 Sulzer Gebrueder AG (Registered) 1,319,186 19,874 Zurich Vericher Namen (Registered) 5,915,041 ------------------ 40,205,348 ------------------ United Kingdom - 23.3% 180,200 3 Group Plc 1,496,441 272,700 Allied Colloids 571,709 1,925,350 Allied Domecq Plc 13,679,963 981,321 AMEC 1,905,220 101,510 Amersham International 2,144,696 695,320 Amstrad Plc 2,166,732 519,300 Anglian Water Plc 5,490,102 454,187 Argos Plc 5,083,302 1,029,900 Arjo Wiggins Appleton Plc 2,722,057 19,820,200 ASDA Group 36,217,055 372,640 Ashley (Laura) Holdings 957,540 1,065,120 Associated British Foods 8,445,432 328,900 Associated British Ports Holdings Ltd 1,682,242 219,000 Astec (BSR) 514,510 1,581,000 Bank of Scotland 8,808,656 960,200 Barratt Development 4,347,221 1,904,530 Bass 26,566,908 214,700 BAT Industries 1,881,020 83,300 BBA Group 466,151 902,500 Beazer Holmes Plc 2,944,858 176,200 Berisford International 393,834
26 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 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------- United Kingdom - continued 7,634,500 BG Plc 21,236,946 139,844 BICC 629,709 341,300 Blue Circle Industries 2,218,971 341,920 Booker Plc 1,913,400 441,400 BPB Industries Plc 2,462,893 725,626 British Aerospace 15,097,160 609,885 British Airways 6,273,648 133,110 British Land Co 1,161,854 2,872,300 British Petroleum 31,842,440 5,211,200 British Steel 12,753,109 10,005,600 British Telecom Plc 69,473,892 943,369 BTR 3,701,551 424,892 Bunzl Co 1,459,210 172,200 Burmah Castrol Plc 2,904,964 5,439,000 Burton Group 13,887,385 435,400 Caradon 1,939,269 83,320 Carlton Communications 709,589 7,634,500 Centrica Plc * 8,158,475 6,398 Charter Plc (Registered) 77,035 38,400 Chubb Security 267,514 2,568,994 Coats Viyella 5,406,795 24,800 Cobham Group Plc 237,305 1,227,772 Cookson Group 4,687,277 433,000 Cordiant Plc * 690,545 157,900 Costain Group (c) 115,926 138,800 Courtaulds 824,286 209,100 Courtaulds Textiles Plc 846,044 160,439 Dalgety Plc 858,560 1,086,000 Dawson International 1,222,548 620 De La Rue Plc 6,292 209,900 Delta 1,202,006 311,600 Electrocomponents Plc 2,041,127 27,462 Energy Group Plc * 233,878 873,471 English China Clays Plc 3,049,645 1,325,400 Enterprise Oil 13,450,066 1,058,400 Eurotunnel SA Units (Registered) * 1,312,353 277,397 FKI 846,312 3,516,315 General Electric 21,398,517 1,127,510 Glaxo Wellcome Plc 19,112,743 211,850 Granada Group 3,193,651 2,436 Grand Metropolitan 18,083 192,600 Great Portland Estates Plc 663,019 428,849 Great Universal Stores Plc 4,554,833 665,453 Greenalls Group Plc 6,058,131 55,500 Greycoat Plc 144,877
See accompanying notes to the financial statements. 27 GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------- United Kingdom - continued 357,100 Guinness 2,668,348 47,100 Hambros 199,793 48,463 Hammerson 346,315 34,328 Hanson Plc 154,017 503,630 Harrisons & Crosfield 1,084,608 630,300 Hazlewood Foods 1,223,718 36,993 Hepworth 158,128 3,581,151 Hillsdown Holdings 11,159,457 233,990 Hyder Plc 3,168,564 1,720,910 Imperial Chemical Industries Plc 21,254,022 27,462 Imperial Tobacco Group Plc * 190,418 246,084 Inchcape 1,067,953 1,093,820 Kingfisher 12,081,521 223,960 Kwik Save Group 1,116,269 5,879,715 Ladbroke Group 22,063,337 2,800 Laird Group 16,423 4,000 Laporte Plc 41,962 4,151,000 Lasmo 16,321,379 2,033,200 Legal & General Group 12,970,118 411,325 Lex Service 2,342,058 1,243,548 Lloyds TSB Group 10,347,128 885,300 London International 2,412,093 5,543,777 Lonrho 13,024,328 815,457 Lucas Variety Plc * 2,720,705 536,726 Marley 1,085,829 487,100 Meggitt 842,386 18,000 MEPC Ord 137,438 115,580 Mercury Asset Management 2,541,907 260,000 Meyer International 1,705,244 646,100 MFI Furniture Group 2,066,060 3,922 Millennium Chemicals Inc 75,008 2,261,789 Mirror Group Plc 7,730,778 228,000 National Grid Holdings Plc 770,003 2,828,130 National Power 22,666,737 395,400 Next 3,838,316 80,165 NFC Plc 224,957 1,303,499 Norcros Plc 1,956,526 331,200 Northern Foods Plc 1,150,951 171,700 Ocean Group 1,315,204 1,811,800 Orange Plc 6,266,618 2,938,300 Peninsular & Oriental Steam Navigation Co 31,974,889 5,113,449 Pilkington 12,096,758 23,100 Powell Duffryn 153,766 848,276 Powergen 8,552,887 98,200 Premier Farnell Plc 789,852
30 See accompanying notes to the financial statements. GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------- United Kingdom - continued 448,800 Racal Electronics 2,123,430 475,600 Railtrack Group Plc 3,511,135 2,235,320 Rank Group Plc * 15,207,675 415,477 Reckitt & Colman 5,402,470 1,029,646 Redland 5,845,939 1,426,100 Rentokil Plc 10,493,336 1,560,500 Reuters Holdings 16,726,929 488,950 Rexam Plc 2,592,596 262,850 RMC Group 4,084,699 3,188,038 Rolls-Royce 12,066,979 125,491 Royal & Sun Alliance Insurance 1,007,314 544,900 Rugby Group 969,015 267,021 Safeway Plc 1,577,034 123,400 Sainsbury (J) 622,101 2,600 Salvesen (Christian) 13,595 13,790 Schroders 381,348 803,400 Scottish Hydro-Electric Plc 4,666,260 2,324,544 Scottish Power Plc 13,273,727 320,800 Scottish & Newcastle Plc 3,543,318 5,381,600 Sears 7,111,865 377,361 Securicor Plc 1,927,030 997,476 Severn Trent Plc 11,603,234 480,810 Shell Transport & Trading (Registered) 8,150,347 451,710 Siebe Plc 7,133,820 1,821,045 Signet Group Plc * 950,731 788,019 Simon Engineering 539,974 77,000 Slough Estates 356,776 179,826 Smith & Nephew Plc 566,235 1,308,202 Smithkline Beecham Plc 19,571,820 80,810 Smiths Industries 1,017,817 590,700 Southern Electric Plc 7,632,718 210,300 Southwest Water 2,353,697 1,233,737 Storehouse Plc 5,515,187 3,060,331 T & N 8,138,476 7,869,600 Tarmac 12,967,645 159,600 Tate & Lyle 1,136,591 2,620,500 Taylor Woodrow Plc 8,165,910 10,700 Telewest Communications Plc * 20,948 3,492,655 Tesco 19,260,141 905,600 Thames Water 10,150,332 30,000 Thistle Hotels Plc * 100,827 225,800 TI Group Plc 1,941,430 1,445,890 Tomkins Plc 6,723,063 362,500 Transport Development Group 1,212,408 134,300 Unigate 1,001,335 303,460 Unilever Plc 7,805,173 1,872,759 United Biscuits 7,332,975
See accompanying notes to the financial statements. 31 GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Par Value($)/ Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------- United Kingdom - continued 124,900 United News & Media Plc 1,442,722 1,608,100 United Utilities 17,394,568 249,930 Vendome Luxury Group Plc Units 2,144,822 301,500 Vickers 1,328,123 742,950 Vodafone Group Plc 3,527,278 699,100 Waste Management International * 2,691,773 563,725 Wessex Water Plc 3,310,982 1,196,840 Whitbread Plc Class A 15,347,785 100,700 Willis Corroon Group Plc 251,367 611,474 Wilson (Connolly) Holdings 1,566,263 2,216,200 Wimpey (George) 5,098,180 47,162 Wolseley 362,410 299,200 Yorkshire Electricity Group 4,359,133 706,200 Yorkshire Water 8,284,069 ------------------ 996,511,138 ------------------ TOTAL STOCK AND EQUIVALENTS (Cost $3,829,977,485) 4,123,957,279 ------------------ SHORT-TERM INVESTMENTS - 13.9% Cash Equivalents - 12.2% $ 53,200,000 Republic Bank of New York Time Deposit, 5.34% due 3/3/97 53,200,000 465,118,468 The Boston Global Investment Trust (d) 465,118,468 ------------------ 518,318,468 ------------------ U.S. Government - 1.7% $ 74,000,000 U.S. Treasury Bill, 5.56% due 1/8/98 (a) 70,618,221 ------------------ TOTAL SHORT-TERM INVESTMENTS (Cost $588,929,520) 588,936,689 ------------------ TOTAL INVESTMENTS - 110.7% (Cost $4,418,907,005) * * 4,712,893,968 Other Assets and Liabilities (net) - (10.7%) (454,446,677) ------------------ TOTAL NET ASSETS - 100.0% $ 4,258,447,291 ==================
Notes to the Schedule of Investments: ADR American Depositary Receipt (a) All or a portion of this security is held as collateral for open futures contracts. (b) Bankrupt issuer. (c) Valued by management (Note 1). (d) Represents investment of security lending collateral (Note 1). * Non-income producing security. A dividend has not been declared for the year ended February 28, 1997. ** The aggregate identified cost for federal income tax purposes is $4,444,715,156, resulting in gross unrealized appreciation and depreciation of $492,635,990 and $224,457,178, respectively, and net unrealized appreciation of $268,178,812. 32 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 28, 1997 - -------------------------------------------------------------------------------- At February 28, 1997, industry sector diversification of the Fund's equity investments was as follows: Industry Sector (Unaudited) Banking 8.2% Conglomerates 7.1 Services 6.4 Utilities 5.8 Real Estate 5.7 Construction 5.4 Oil and Gas 5.4 Consumer Goods 5.0 Chemicals 4.7 Retail Trade 4.6 Telecommunications 4.2 Machinery 4.0 Health Care 4.0 Electronic Equipment 3.9 Transportation 3.4 Food and Beverage 3.2 Automotive 2.6 Communications 2.2 Metals and Mining 2.1 Insurance 2.1 Paper and Allied Products 2.1 Financial Services 1.2 Aerospace 1.1 Textiles 0.7 Computers 0.7 Miscellaneous 4.2 ----- 100.0% =====
See accompanying notes to the financial statements. 31 GMO International Core Fund (A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1997 - -------------------------------------------------------------------------------------------------- Assets: Investments, at value (cost $4,418,907,005) (Note 1) $ 4,712,893,968 Foreign currency, at value (cost $10,330,708) (Note 1) 10,322,949 Cash 69,550 Receivable for Fund shares sold 11,788 Receivable for investments sold 110,214,504 Dividends and interest receivable 3,966,583 Foreign withholding taxes receivable 4,818,096 Receivable for open swap contracts (Note 1) 22,592,200 Receivable for daily variation margin on open futures contracts 235,333 Receivable for open forward foreign currency contracts (Note 6) 75,418,471 Receivable for expenses waived or borne by Manager (Note 2) 1,183,642 ------------------- Total assets 4,941,727,084 ------------------- Liabilities: Payable upon return of securities loaned (Note 1) 465,118,468 Payable for investments purchased 100,587,432 Payable for open forward foreign currency contracts (Note 6) 103,379,768 Payable for Fund shares repurchased 10,085,397 Payable to affiliate for (Note 2): Management fee 2,463,680 Shareholder service fee 494,215 Accrued expenses 1,150,833 ------------------- Total liabilities 683,279,793 ------------------- Net assets $ 4,258,447,291 =================== Net assets consist of: Paid-in capital $ 3,883,061,264 Accumulated undistributed net investment income 9,222,649 Accumulated undistributed net realized gain 81,342,864 Net unrealized appreciation 284,820,514 ------------------- $ 4,258,447,291 =================== Net assets attributable to: Class I Shares $ 208,388 =================== Class II Shares $ 25,302,379 =================== Class III Shares $ 4,232,936,524 =================== Shares outstanding: Class I 8,554 =================== Class II 1,038,814 =================== Class III 173,673,156 =================== Net asset value per share: Class I $ 24.36 =================== Class II $ 24.36 =================== Class III $ 24.37 ===================
32 See accompanying notes to the financial statements. GMO International Core Fund (A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1997 - ----------------------------------------------------------------------------------------------------- Investment income: Dividends (net of foreign tax expense of $13,152,317) $ 116,755,028 Interest (including securities lending income of $2,678,216) 17,528,094 --------------------- Total income 134,283,122 --------------------- Expenses: Management fee (Note 2) 33,112,051 Custodian fees 3,179,085 Stamp duties and transfer taxes 763,267 Legal fees 230,796 Audit fees 84,433 Registration fees 56,542 Transfer agent fees 45,289 Trustees fee (Note 2) 22,361 Miscellaneous 40,182 Fees waived or borne by Manager (Note 2) (11,195,222) --------------------- 26,338,784 Shareholder service fee (Note 2) Class I 266 Class II 21,305 Class III 4,872,989 --------------------- Net expenses 31,233,344 --------------------- Net investment income 103,049,778 --------------------- Realized and unrealized gain (loss): Net realized gain (loss) on: Investments 347,712,058 Closed futures contracts (37,831,976) Closed swap contracts (12,233,075) Foreign currency, forward contracts and foreign currency related transactions (65,761,352) --------------------- Net realized gain 231,885,655 --------------------- Change in net unrealized appreciation (depreciation) on: Investments (52,573,782) Open futures contracts (4,472,726) Open swap contracts 24,926,117 Foreign currency, forward contracts and foreign currency related transactions (10,241,123) --------------------- Net unrealized loss (42,361,514) --------------------- Net realized and unrealized gain 189,524,141 --------------------- Net increase in net assets resulting from operations $ 292,573,919 =====================
See accompanying notes to the financial statements. 33 GMO International Core Fund (A Series of GMO Trust) Statement of Changes in Net Assets - --------------------------------------------------------------------------------
Year Ended February 28, 1997 February 29, 1996 ----------------------- ----------------------- Increase (decrease) in net assets: Operations: Net investment income $ 103,049,778 $ 65,306,198 Net realized gain 231,885,655 109,487,879 Change in net unrealized appreciation (depreciation) (42,361,514) 289,471,168 ----------------------- ----------------------- Net increase in net assets resulting from operations 292,573,919 464,265,245 ----------------------- ----------------------- Distributions to shareholders from: Net investment income Class I (2,078) - Class II (231,954) - Class III (56,618,907) (62,905,553) ----------------------- ----------------------- Total distributions from net investment income (56,852,939) (62,905,553) ----------------------- ----------------------- Net realized gains Class I (8,575) - Class II (932,158) - Class III (264,270,135) (102,400,553) ----------------------- ----------------------- Total distributions from net realized gains (265,210,868) (102,400,553) ----------------------- ----------------------- Net share transactions: (Note 5) Class I 206,837 - Class II 25,522,151 - Class III (275,828,032) 1,647,431,232 ----------------------- ----------------------- Increase (decrease) in net assets from net fund share transactions (250,099,044) 1,647,431,232 ----------------------- ----------------------- Total increase (decrease) in net assets (279,588,932) 1,946,390,371 Net assets: Beginning of period 4,538,036,223 2,591,645,852 ----------------------- ----------------------- End of period (including accumulated undistributed net investment income (loss) of $9,222,649 and $(5,469,509), respectively) $ 4,258,447,291 $ 4,538,036,223 ======================= =======================
34 See accompanying notes to the financial statements. GMO International Core Fund (A Series of GMO Trust) Financial Highlights (For a Class I share outstanding throughout the period) - --------------------------------------------------------------------------------
Period from September 10, 1996 (commencement of operations) to February 28, 1997 -------------------- Net asset value, beginning of period $ 24.17 ------------------------------- Income (loss) from investment operations: Net investment income 0.14 Net realized and unrealized gain (loss) on investments 1.38 ------------------------------- Total from investment operations 1.52 ------------------------------- Less distributions to shareholders: From net investment income (0.26) From net realized gains (1.07) ------------------------------- Total distributions (1.33) ------------------------------- Net asset value, end of period $ 24.36 =============================== Total Return (a) 6.38% Ratios/Supplemental Data: Net assets, end of period (000's) $ 208 Net expenses to average daily net assets 0.85%*(b) Net investment income to average daily net assets 1.12%* Portfolio turnover rate 97% Average broker commission rate (c) $ 0.0062 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.04
* Annualized (a) Calculation excludes purchase premiums. The total return would have been lower had certain expenses not been waived during the period shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .03% of average daily net assets. (c) The average broker commission rate will vary depending on the markets in which trades are executed. See accompanying notes to the financial statements. 35 GMO International Core Fund (A Series of GMO Trust) Financial Highlights (For a Class II share outstanding throughout the period) - -------------------------------------------------------------------------------
Period from September 26, 1996 (commencement of operations) to February 28, 1997 -------------------- Net asset value, beginning of period $ 24.60 -------------------- Income (loss) from investment operations: Net investment income 0.14 Net realized and unrealized gain (loss) on investments 0.96 -------------------- Total from investment operations 1.10 -------------------- Less distributions to shareholders: From net investment income (0.27) From net realized gains (1.07) -------------------- Total distributions (1.34) -------------------- Net asset value, end of period $ 24.36 ==================== Total Return (a) 4.51% Ratios/Supplemental Data: Net assets, end of period (000's) $ 25,302 Net expenses to average daily net assets 0.80% *(b) Net investment income to average daily net assets 0.98%* Portfolio turnover rate 97% Average broker commission rate (c) $ 0.0062 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.05
* Annualized (a) Calculation excludes purchase premiums. The total return would have been lower had certain expenses not been waived during the period shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .04% of average daily net assets. (c) The average broker commission rate will vary depending on the markets in which trades are executed. 36 See accompanying notes to the financial statements. 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, ----------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------ ----------- ------------ ------------ ------------ Net asset value, beginning of period $ 24.62 $ 22.32 $ 25.56 $ 18.51 $ 18.80 ------------ ----------- ------------ ------------ ------------ Income (loss) from investment operations: Net investment income 0.59 0.36 0.27 0.29 0.29 Net realized and unrealized gain (loss) on investments 1.02 3.09 (1.57) 7.44 (0.04) ------------ ----------- ------------ ------------ ------------ Total from investment operations 1.61 3.45 (1.30) 7.73 0.25 ------------ ----------- ------------ ------------ ------------ Less distributions to shareholders: From net investment income (0.33) (0.39) (0.35) (0.27) (0.20) From net realized gains (1.53) (0.76) (1.59) (0.41) (0.34) ------------ ----------- ------------ ------------ ------------ Total distributions (1.86) (1.15) (1.94) (0.68) (0.54) ------------ ----------- ------------ ------------ ------------ Net asset value, end of period $ 24.37 $ 24.62 $ 22.32 $ 25.56 $ 18.51 ============ =========== ============ ============ ============ Total Return (a) 6.72% 15.72% (5.31%) 42.10% 1.43% Ratios/Supplemental Data: Net assets, end of period (000's) $ 4,232,937 $ 4,538,036 $ 2,591,646 $ 2,286,431 $ 918,332 Net expenses to average daily net assets 0.71% (b) 0.72% (b) 0.70% 0.71% (b) 0.70% Net investment income to average daily net assets 2.34% 1.93% 1.48% 1.48% 2.36% Portfolio turnover rate 97% 14% 53% 23% 23% Average broker commission rate (c) $ 0.0062 N/A N/A N/A N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.06 $ 0.03 $ 0.03 $ 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. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .02% of average daily net assets. (c) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. The average broker commission rate will vary depending on the markets in which trades are executed. See accompanying notes to the financial statements. 37 GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statement February 28, 1997 - -------------------------------------------------------------------------------- 1. Significant accounting policies The 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, 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 maximum total return through investment in a portfolio of common stocks of non-U.S. issuers. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 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. 38 GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statement - continued - -------------------------------------------------------------------------------- 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 net exchange gains and losses on disposition of foreign currencies, 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 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 specified price 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 purchase of 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 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 held as of February 28, 1997. 39 GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statement - continued - -------------------------------------------------------------------------------- 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 28, 1997. 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 equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return based on a notional amount. 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, 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 is 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 28, 1997. 40 GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statement - continued - -------------------------------------------------------------------------------- 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 28, 1997, the Fund loaned securities having a market value of $425,345,558 collateralized by cash in the amount of $465,118,468, 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to the differing treatments for foreign currency and passive foreign investment company transactions and redemptions in-kind. Gains resulting from such in-kind transactions amounted to $11,290,578. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments. 41 GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statement - continued - --------------------------------------------------------------------------------
Undistributed Net Investment Accumulated Net Realized Income Gain/(Loss) Paid-in Capital ------------------------------------- --------------------------------- -------------------------- ($31,504,681) $20,249,536 $11,255,145
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. 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 in such manner as deemed equitable by the Trustees, 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 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. Prior to June 1, 1996, the premium on cash purchases was .75% of the amount invested. All purchase premiums are paid to and recorded as paid in capital by the Fund. For the year ended February 28, 1997, the Fund received $2,286,211 in purchase premiums. There is no premium for cash redemptions or reinvested distributions. 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 and the possible imposition of currency exchange blockages 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. 42 GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statement - continued - -------------------------------------------------------------------------------- 2. Fees and other transactions with affiliates GMO receives a management fee paid monthly at the annual rate of .75% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares and .15% for Class III shares. GMO has agreed to waive a portion of its fee until further notice 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) exceed .54% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for fees exceeding .69%; thus the net annual expense ratio after the waiver for a Class III shareholder is unchanged. Additionally, prior to June 27, 1995, this voluntary expense limitation was .70% 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 28, 1997, was $22,361. 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 28, 1997 aggregated $4,272,351,520 and $3,985,379,651, respectively. 4. Principal shareholders At February 28, 1997, 98% of the outstanding Class I shares of the Fund were held by one shareholder and 100% of the outstanding Class II shares of the Fund were held by two shareholders, each holding in excess of 10% of the outstanding shares of the respective class. 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: 43 GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - --------------------------------------------------------------------------------
Period from September 10, 1996 (commencement of operations) to February 28, 1997 -------------------------------------------------------- Class I: Shares Amount ------------------------ ------------------------ Shares sold 8,196 $ 198,184 Shares issued to shareholders in reinvestment of distributions 440 10,653 Shares repurchased (82) (2,000) ------------------------ ------------------------ Net increase 8,554 $ 206,837 ======================== ======================== Period from September 26, 1996 (commencement of operations) to February 28, 1997 ------------------------------------------------------------ Class II: Shares Amount ---------------------------- --------------------------- Shares sold 990,710 $ 24,358,040 Shares issued to shareholders in reinvestment of distributions 48,104 1,164,111 Shares repurchased - - ---------------------------- --------------------------- Net increase 1,038,814 $ 25,522,151 ============================ ===========================
Year Ended Year Ended February 28, 1997 February 29, 1996 -------------------------------------------- ----------------------------------------- Class III: Shares Amount Shares Amount ------------------- ---------------------- ----------------- -------------------- Shares sold 26,694,331 $ 662,148,445 83,979,899 $ 2,029,145,465 Shares issued to shareholders in reinvestment of distributions 12,151,121 296,116,351 6,005,465 141,837,051 Shares repurchased (49,513,521) (1,234,092,828) (21,748,238) (523,551,284) ------------------- ---------------------- ----------------- -------------------- Net increase (10,668,069) $ (275,828,032) 68,237,126 $ 1,647,431,232 =================== ====================== ================= ====================
44 GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 6. Financial instruments A summary of outstanding financial instruments at February 28, 1997 is as follows: Forward currency contracts
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) -------------- -------------------------- -------------------- -------------------- ------------------ Buys 3/3/97 ATS 332,677,454 $ 28,000,324 $ (745,179) 3/3/97 AUD 3,011,707 2,337,536 (1,054) 3/7/97 AUD 2,424,335 1,881,539 (21,346) 4/9/97 AUD 14,871,000 11,530,081 (218,009) 5/9/97 AUD 13,490,860 10,456,226 (37,774) 7/11/97 AUD 795,665 616,388 361 3/3/97 BEF 80,527,213 2,312,273 1,592 3/7/97 BEF 2,914,255,748 83,693,078 (9,633,853) 4/9/97 BEF 981,760,650 28,224,652 (2,570,851) 5/7/97 BEF 1,825,664,415 52,571,498 (1,811,985) 7/11/97 BEF 2,824,880,035 81,667,771 (35,195) 4/9/97 CAD 954,000 699,680 (11,343) 5/9/97 CAD 792,863 582,682 (11,000) 3/3/97 CHF 2,866,174 1,943,169 0 3/7/97 CHF 1,868,753 1,267,329 2,949 5/9/97 CHF 1,558,590 1,063,660 (46,012) 3/3/97 DEM 498,218,745 295,127,059 (22,112,142) 3/7/97 DEM 2,622,824 1,553,956 (31,813) 4/9/97 DEM 51,340,000 30,479,316 (2,686,059) 5/9/97 DEM 116,263,679 69,157,107 (2,793,003) 3/3/97 DKK 13,172,527 2,045,328 (67,404) 3/7/97 DKK 11,743,077 1,823,653 (185,529) 3/3/97 ESP 315,513,430 2,201,001 (6,777) 3/7/97 ESP 803,840,311 5,607,176 (16,992)
45 GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward currency contracts - continued
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) -------------- -------------------------- -------------------- -------------------- ------------------ Buys - continued 4/9/97 ESP 3,737,715,000 $ 26,043,237 $ (2,272,785) 6/13/97 ESP 22,373,549,433 155,747,781 (2,715,219) 3/3/97 FIM 3,655,073 725,955 (3,601) 3/7/97 FIM 192,960,118 38,332,077 (2,590,246) 7/11/97 FIM 48,881,120 9,788,048 (30,395) 3/3/97 FRF 28,411,999 4,986,967 (238,036) 3/7/97 FRF 8,055,103 1,414,106 (59,298) 4/9/97 FRF 734,502,260 129,206,864 (9,051,184) 3/3/97 GBP 8,172,149 13,332,861 (267,638) 3/7/97 GBP 2,415,314 3,940,377 (70,867) 3/10/97 GBP 14,398,848 23,489,252 (484,830) 4/9/97 GBP 115,805,144 188,810,676 6,474,948 3/3/97 HKD 78,017,583 10,074,585 (651) 3/7/97 HKD 6,173,248 797,154 112 5/9/97 HKD 285,505,525 36,855,211 (52,789) 3/3/97 IEP 15,039,411 23,816,412 (1,421,424) 3/7/97 IEP 17,703,251 28,033,919 (159,676) 3/3/97 ITL 15,222,762,000 9,007,551 (781,071) 3/7/97 ITL 964,708,870 570,737 (26,680) 5/9/97 ITL 8,304,765,650 4,896,418 (236,848) 6/13/97 ITL 51,510,023,590 30,316,430 (1,278,570) 3/3/97 JPY 7,196,683,325 59,629,491 (2,670,824) 3/7/97 JPY 19,548,771,569 162,042,397 (6,737,425) 4/9/97 JPY 21,735,478,363 180,966,117 (8,699,464) 7/11/97 JPY 13,660,843,264 115,279,497 827,330 3/3/97 MYR 266,396 107,288 220 3/7/97 MYR 1,488,530 599,411 1,226
46 GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward currency contracts - continued
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) -------------- -------------------------- -------------------- -------------------- ------------------ Buys - continued 5/9/97 MYR 4,050,880 $ 1,627,232 $ 3,112 3/3/97 NLG 343,140 180,714 (5,159) 3/7/97 NLG 153,784,918 81,005,758 (2,282,873) 4/9/97 NLG 158,768,084 83,815,360 (6,325,760) 5/9/97 NLG 9,547,257 5,050,342 (146,010) 3/3/97 NOK 192,774,186 28,607,666 (1,190,827) 3/7/97 NOK 703,365 104,397 (4,235) 4/9/97 NOK 188,862,200 28,086,480 (1,608,834) 6/13/97 NOK 694,369,326 103,568,099 (3,538,901) 3/3/97 NZD 33,961,701 23,493,007 (384,591) 4/9/97 NZD 33,789,410 23,322,464 16,219 5/9/97 NZD 11,902,230 8,199,565 18,567 3/3/97 SEK 126,757,784 16,905,433 (187,907) 3/7/97 SEK 3,770,917 502,969 (1,955) 6/13/97 SEK 626,772,229 83,859,312 (1,209,688) 3/3/97 SGD 294,788 206,724 (4,276) 3/7/97 SGD 445,731 312,570 (4,552) ------------------ $ (92,441,773) ================== Sales 3/3/97 ATS 332,677,454 $ 28,000,324 $ 2,536,676 3/3/97 AUD 3,011,707 2,337,536 106,464 3/7/97 AUD 2,424,335 1,881,539 14,520 4/9/97 AUD 136,058,330 105,600,312 1,885,768 7/11/97 AUD 3,011,707 2,335,659 (984) 3/3/97 BEF 80,527,213 2,312,273 242,727 3/7/97 BEF 2,914,225,748 83,693,078 (46,547)
47 GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - --------------------------------------------------------------------------------
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) -------------- -------------------------- -------------------- -------------------- ------------------ Sales - continued 7/11/97 BEF 8,848,500 $ 256,337 $ (896) 4/9/97 CAD 954,000 699,680 (1,546) 5/9/97 CAD 792,863 582,682 9,360 3/3/97 CHF 2,866,174 1,943,169 272,831 3/7/97 CHF 1,868,753 1,267,329 127,471 7/11/97 CHF 4,734,927 3,256,611 (7,016) 3/3/97 DEM 498,218,745 295,127,059 10,949,947 3/7/97 DEM 2,622,824 1,553,956 138,844 4/9/97 DEM 51,340,000 30,479,316 625,750 5/9/97 DEM 116,263,679 69,157,107 1,432,404 3/3/97 DKK 13,172,527 2,045,328 233,338 3/7/97 DKK 11,743,077 1,823,653 67,583 3/3/97 ESP 315,513,430 2,201,001 224,999 3/7/97 ESP 803,840,311 5,607,176 619,367 7/11/97 ESP 1,119,353,741 7,798,273 23,032 3/3/97 FIM 3,655,073 725,955 70,045 3/7/97 FIM 192,960,118 38,332,077 1,520,353 7/11/97 FIM 19,973,671 4,006,559 13,097 3/3/97 FRF 28,411,999 4,986,967 480,033 3/7/97 FRF 8,055,103 1,414,106 129,094 4/9/97 FRF 734,502,260 129,206,864 7,887,109 3/3/97 GBP 8,172,149 13,332,861 375,102 3/7/97 GBP 2,415,314 3,940,377 135,223 3/10/97 GBP 14,398,848 23,489,252 (1,070,246) 4/9/97 GBP 115,805,144 188,810,676 3,236,387 3/3/97 HKD 78,017,583 10,074,585 11,580 3/7/97 HKD 6,173,248 797,154 846
48 GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued
- ---------------------------------------------------------------------------------------------------------------------------- Forward currency contracts - continued Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) -------------- -------------------------- -------------------- -------------------- ------------------ Sales - continued 4/9/97 HKD 1,428,954,700 $ 184,513,625 $ 219,781 6/5/97 HKD 913,202,000 117,893,314 106,686 7/11/97 HKD 84,190,831 10,867,199 (870) 11/7/97 HKD 830,535,241 107,153,547 74,552 3/3/97 IEP 15,039,411 23,816,412 89,287 3/7/97 IEP 17,703,251 28,033,919 1,120,067 3/3/97 ITL 15,222,762,000 9,007,551 559,197 3/7/97 ITL 964,708,870 570,737 57,063 5/9/97 ITL 8,304,765,650 4,896,418 220,183 3/3/97 JPY 7,196,683,325 59,629,491 2,117,081 3/7/97 JPY 19,548,771,569 162,042,397 5,417,382 5/9/97 JPY 4,155,999,995 34,780,571 968,429 6/13/97 JPY 7,995,990,800 67,246,507 (1,218,507) 7/11/97 JPY 11,862,575,758 100,181,366 (1,148,900) 3/3/97 MYR 266,396 107,288 (2,288) 3/7/97 MYR 1,488,530 599,411 (12,011) 5/9/97 MYR 4,050,880 1,627,232 (5,777) 3/3/97 NLG 343,140 180,714 19,286 3/7/97 NLG 153,784,918 81,005,758 9,684,747 4/9/97 NLG 158,768,084 83,815,360 3,906,627 5/9/97 NLG 9,547,258 5,050,342 215,658 3/3/97 NOK 192,774,186 28,607,666 1,886,456 3/7/97 NOK 703,365 104,397 5,003 4/9/97 NOK 188,862,200 28,086,480 1,096,030 3/3/97 NZD 33,961,701 23,493,007 (75,771) 4/9/97 NZD 33,789,410 23,322,464 499,070 5/9/97 NZD 11,902,230 8,199,565 139,435 49
GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward currency contracts - continued
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) -------------- -------------------------- -------------------- -------------------- ------------------ Sales - continued 3/3/97 SEK 126,757,784 $ 16,905,433 $ 1,832,131 3/7/97 SEK 3,770,917 502,969 46,231 4/9/97 SEK 38,030,000 5,080,557 435,834 5/9/97 SEK 967,793,711 129,438,522 3,806,121 7/11/97 SEK 130,528,701 17,503,097 169,991 3/3/97 SGD 294,788 206,724 2,926 3/7/97 SGD 445,731 312,570 6,631 ------------------ $ 64,480,476 ==================
Currency Abbreviations ATS Austrian Schilling HKD Hong Kong Dollar AUD Australian Dollar IEP Irish Pound BEF Belgian Franc ITL Italian Lira CAD Canadian Dollar JPY Japanese Yen CHF Swiss Franc MYR Malaysian Ringgit DEM German Mark NLG Netherlands Guilder DKK Danish Krona NOK Norwegian Kroner ESP Spanish Peseta NZD New Zealand Dollar FIM Finnish Markka SEK Swedish Krona FRF French Franc SGD Singapore Dollar GBP British Pound 50 GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Futures contracts
Net Unrealized Number of Appreciation Contracts Type Expiration Date Contract Value (Depreciation) ----------------- --------------------- ---------------------- --------------------- --------------------- Buys 1,332 MIB30 March 1997 $ 136,699,456 $ 12,297,679 1,636 OMX March 1997 44,805,031 (949,624) 860 TOPIX March 1997 99,332,173 871,024 1,969 TSE 35 March 1997 234,928,824 11,713,449 --------------------- $ 23,932,528 ===================== Sales 226 DAX March 1997 $ 43,655,136 $ (5,542,402) 157 FT-SE 100 March 1997 27,439,626 (1,525,174) 1,926 Hang Seng March 1997 165,018,208 2,360,179 198 IBEX March 1997 7,294,301 353,135 3,986 All Ords March 1997 187,724,506 (3,872,344) 1,882 CAC 40 March 1997 173,358,187 (18,962,293) --------------------- $ (27,188,899) =====================
At February 28, 1997 the Fund has cash and/or securities to cover any margin requirements on open futures contracts. 51 GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - --------------------------------------------------------------------------------
Swap agreements Notional Expiration Unrealized Amount Date Description Appreciation ------------------------- --------------- ---------------------------------------------------- ----------------- CHF 144,196,000 08/06/97 Agreement with Swiss Bank Corporation dated August 6, 1996 to pay the notional amount multiplied by 6 month LIBOR adjusted by a specified spread and to receive (pay) the notional amount multiplied by the return on the Swiss Market Index (including dividends). $ 22,592,200 =================
52 GMO International Core Fund (A Series of GMO Trust) Federal Income Tax Information on Distributions - (Unaudited) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all the Fund's distributions are from investment company taxable income, except that the Fund has designated 69.80% of distributions as net capital gain dividends. 53 GMO International Core Fund (A Series of GMO Trust) Portfolio Managers - ------------------ Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. Management Discussion and Analysis of Fund Performance - ------------------------------------------------------ The Class III shares of the GMO International Core Fund returned 6.7% for the fiscal year ended February 28, 1997 as compared to 3.2% for EAFE and 7.7% for the GMO EAFE-Lite Index. Consistent with the Fund's investment objective and policies, the Fund was invested substantially in common stocks throughout the period. Effect of country weights (local currency terms) With the exception of Japan and Singapore, the majority of the EAFE countries experienced strong performance during the year. The Japanese market declined by - -8.8% in local terms, while EAFE ex-Japan rose by 25.6%. These returns were depressed somewhat for U.S. investors as a result of the dollar's rally during the period, 7.6% versus an EAFE-Lite basket of currencies. Relative to the GMO EAFE-Lite Index, the impact of the Fund's country weights negatively impacted performance for the year, in spite of a modest underweight in Japan. The primary influence was the Fund's underweighting of the Netherlands, an expensive market which strongly outperformed the index during the year. Additionally, underweightings in France and Germany and an overweighting in Singapore contributed negatively as well. These results were partially offset by the positive impact of the Fund's underweighting of Japan and overweighting of Canada, Italy and Spain. Relative to EAFE, country selection added value, primarily due to the Fund's underweight in Japan. Effect of currency weights The effect of the Fund's currency weights added value to the account's relative performance, primarily from underweighting the yen, Swiss franc and Dutch guilder. The Fund also benefited from an overweight position in the pound sterling, which was the strongest performing currency for the year. The Fund was modestly hedged back to the U.S. dollar during the year, which added value as well. Effect of stock selection Stock selection contributed negatively to the Fund's performance for the year. Growth stocks led the strong performance in many of the developed international markets, while value-based investing lagged. International small capitalization stocks outperformed modestly, following on very weak performance in 1995. Portfolio structure and outlook Country selection. We modestly favor Canada, Italy, Singapore and Spain and are underweight in Japan and the major European countries (Germany, the U.K., France and Switzerland). We also continue to underweight the Netherlands, which, following its strong run this year, looks even more expensive to us than it has been in the past. Stock selection. Over time we have gradually broadened the techniques used by the International Core Fund to select stocks. From the simple value screens we began using successfully fifteen years ago, today value includes a proprietary price-to-dividend discount measure. We expect that the use of the dividend discount model, which focuses on value stocks while giving companies credit for financial and operating "quality", will enable the portfolio to be most responsive to opportunities for a value-based strategy in a more competitive investing environment. We have diversified the techniques used to select stocks in the portfolio to include momentum screens which allow the portfolio to own selected growth stocks with attractive characteristics. As a result, we expect the portfolio to more flexible than it has been previously, weathering those periods when value investing is out of favor. Further, the Fund's stock selection models have been customized to add value on a country basis. Today the portfolio is positioned to be flexible to style shifts in the international markets. Value remains at the heart of our approach, however, as the staying power of growth and momentum-based techniques tends to be more limited than value investing and reversals tend to be more severe. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co LLC Management. They are not meant as investment advise. 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 28, 1997
Average Annual Total Return Since 1 Year 5 Year Inception Class III 3/31/87 6.1% 10.9% 10.5% Class II 9/26/96 n/a n/a 3.9% Class I 9/10/96 n/a n/a 5.7%
[LINE GRAPH APPEARS HERE]
Date GMO International Core Fund MSCI EAFE Index 03/31/87 9,940 10,000 02/29/88 9,923 10,977 02/28/89 12,698 13,264 02/28/90 14,434 12,838 02/28/91 15,533 12,542 02/29/92 15,964 11,611 02/28/93 16,198 11,132 02/28/94 23,006 15,493 02/28/95 21,784 14,805 02/29/96 25,209 17,300 02/28/97 26,903 17,860
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. 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 paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Performance for Class I shares and Class II shares may be different due to higher shareholder service fees. Past performance is not indicative of future performance. Information is unaudited. GMO Japan Fund (A Series of GMO Trust) Annual Report February 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 17, 1997 GMO Japan Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - --------------------------------------------------------------------------------------------------------------- STOCK AND EQUIVALENTS - 88.5% Automotive - 6.0% 141,000 Fuji Heavy Industries Ltd 671,762 56,000 Hino Motors 337,327 14,000 Honda Motor Co Ltd 432,679 4,900 Mabuchi Motor Co 244,005 444,000 Mazda Motor Corp * 1,294,954 7,000 Mitsubishi Motors 51,330 22,000 NGK Insulators 200,514 23,000 NGK Spark Plug Co 236,308 711,000 Nissan Motor Co Ltd 4,194,482 20,000 Suzuki Motor Corp 187,257 189,000 Toyota Motor Corp 4,838,926 33,000 Yamaha Motor Co 281,631 21,000 Yokohama Rubber Co 86,130 19,000 Yuasa Corp * 69,268 -------------------- 13,126,573 -------------------- Banking - 6.7% 25,000 77th Bank 204,035 78,000 Asahi Bank Ltd 571,315 36,000 Ashikaga Bank Ltd 120,209 55,000 Bank of Fukuoka Ltd 288,466 7,000 Bank of Kyoto Ltd 30,450 134,000 Bank of Tokyo-Mitsubishi 2,198,359 81,000 Bank of Yokohama Ltd 387,919 19,000 Chiba Bank Ltd 112,404 27,000 Chugoku Bank Ltd 357,942 7,000 Credit Saison Co 149,060 146,000 Daiwa Bank Ltd 586,710 70,000 Fuji Bank 817,798 37,000 Gunma Bank Ltd 286,337 19,000 Hachijuni Bank 166,874 1,000 Higo Bank Ltd 5,634 53,000 Hiroshima Bank Ltd 214,740 123,000 Hokkaido Bank Ltd 166,120 224,000 Hokkaido Takushoku Bank Ltd 280,255 16,000 Hokuriku Bank Ltd 55,017 149,000 Industrial Bank of Japan 1,777,778 58,000 Long Term Credit Bank of Japan 209,048 45,000 Mitsubishi Trust & Banking Corp 495,899 8,000 Nishi Nippon Bank Ltd 39,904 281,000 Sakura Bank Ltd 1,795,103
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 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------------------ Banking - continued 35,000 Sanwa Bank Ltd 403,099 96,000 Sumitomo Trust & Banking Co Ltd 783,495 86,000 Tokai Bank Ltd 695,468 79,000 Toyo Trust & Banking Co Ltd 564,239 2,000 Yamaguchi Bank Ltd 24,526 218,000 Yasuda Trust and Banking Co Ltd 592,460 -------------------- 14,380,663 -------------------- Chemicals - 3.2% 75,000 Daicel Chemical Industries Ltd 323,142 119,000 Dainippon Ink & Chemicals Inc 375,665 39,000 Denki Kagaku Kogyo 86,925 1,000 Hitachi Chemical Co 7,465 82,000 Ishihara Sangyo Kaisha * 189,560 55,000 Japan Synthetic Rubber Co Ltd 390,090 36,000 Kansai Paint Co Ltd 148,844 35,000 Kureha Chemical Industry Co Ltd 135,140 167,000 Mitsubishi Gas Chemical Co Inc 611,600 371,000 Mitsubishi Kasei Corp 1,029,787 23,000 Mitsubishi Rayon Co Ltd 83,470 64,000 Mitsui Petrochemical Industries Ltd 293,777 29,000 Nippon Carbon Co Ltd * 80,495 18,000 Nippon Chemical 117,972 1,000 Nippon Shokubai Corp 6,380 1,000 Nippon Soda Chemical Co Ltd 7,291 196,000 Sekisui Chemical Co Ltd 2,029,994 8,000 Shin-Etsu Chemical Co Ltd 154,445 16,000 Showa Denko 35,131 162,000 Teijin Ltd 644,295 3,000 Toagosei Chemical Industry Co Ltd 10,589 24,000 Tokyo Ink Manufacturing Co Ltd 90,877 18,000 Toray Industries Inc 104,101 -------------------- 6,957,035 -------------------- Computers and Office Equipment - 0.3% 60,000 Casio Computer Co 462,342 23,000 NCR Japan Ltd 178,184 -------------------- 640,526 -------------------- Construction - 3.8% 184,000 Aoki Corp * 265,275 2,000 Chudenko Corp 57,171 8,700 Daito Trust Construction Co Ltd 85,061 2,000 Daiwa House Industry Co Ltd 22,206
2 See accompanying notes to the financial statements. GMO Japan Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------------------- Construction - continued 90,000 Fujita Corp 160,328 103,000 Haseko Corp * 199,702 54,000 Hazama-Gumi Ltd 120,805 40,000 INAX Corp 263,485 35,000 Kajima Corp 191,399 3,000 Kandenko Co 25,354 93,000 Kawasaki Heavy Industry 385,285 172,000 Kumagai Gumi Co Ltd 270,776 46,000 Maeda Corp 279,377 33,000 Misawa Homes 201,243 197,000 Mitsui Engineering & Shipbuilding * 370,528 18,000 National House Industrial 217,748 14,000 Nichiei Co Ltd 26,100 66,000 Nihon Cement Co Ltd 314,442 29,000 Obayashi Corp 179,012 26,000 Okumura Corp 137,443 78,000 Onoda Cement Co Ltd 274,024 37,000 Penta Ocean Construction 132,132 18,000 Sankyo Aluminum Industry Co Ltd 59,508 29,000 Sanwa Shutter Corp 209,769 32,000 Sato Kogyo Co Ltd 71,588 108,000 Sekisui House Ltd 1,002,237 21,000 Shimizu Corp 126,672 17,000 Shokusan Jutaku Sogo Co Ltd * 28,594 165,000 Sumitomo Heavy Industries Ltd 497,639 97,000 Sumitomo Osaka Cement Co Ltd 265,225 121,000 Taisei Corp 521,336 15,000 Tekken Corp 59,284 1,000 Toa Corp 4,657 52,000 Tokyo Construction Co Ltd 114,608 24,000 Tostem Corp 556,798 41,000 Toto Ltd 417,847 5,000 Toyo Exterior Co Ltd 68,357 5,000 Yokogawa Bridge Corp 42,257 -------------------- 8,225,272 -------------------- Consumer Goods - 8.3% 66,000 Ajinomoto Co Inc 596,073 34,000 Citizen Watch Co 242,274 31,000 Ezaki Glico Co Ltd 256,856 119,000 Fuji Photo Film Co Ltd 3,983,429 21,000 Hitachi Maxell Ltd 421,079 115,000 Kao Corp 1,257,768 106,000 Konica Corp 637,634
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 28, 1997
Shares Description Value ($) - --------------------------------------------------------------------------------------------------------------- Consumer Goods - continued 67,000 Minolta Co Ltd 413,580 52,000 Nikon Corp 762,615 3,700 Nintendo Co Ltd 260,892 124,000 Olympus Optical Co Ltd 1,037,700 332,000 Sanyo Electric Co Ltd 1,383,677 62,000 Sony Corp 4,474,439 145,000 Victor Co of Japan Ltd 1,381,639 27,000 Yakult Honsha Co Ltd 272,931 42,000 Yamaha Corp 800,398 -------------------- 18,182,984 -------------------- Electric - 4.7% 19,000 Alps Electric Co Ltd 201,508 75,000 Fuji Electric Co 309,471 137,000 Furukawa Electric Co Ltd 636,813 4,000 Hirose Electric 224,045 8,000 Hitachi Cable Ltd 54,089 10,000 Kokusai Electric 154,942 17,000 Kyushu Matsushita Electric 185,931 221,000 Matsushita Electric Industrial Co Ltd 3,405,916 122,000 Matsushita Electric Works Ltd 1,071,506 477,000 Mitsubishi Electric Corp 2,679,642 5,000 Mitsumi Electric Co Ltd 93,214 64,000 Oki Electric Industry 337,261 52,000 Showa Electric Wire & Cable 174,928 47,000 Stanley Electric Co Ltd 239,108 85,000 Tokyo Electric Co Ltd * 309,885 27,000 Yokogawa Electric Corp 206,935 -------------------- 10,285,194 -------------------- Electronics - 3.1% 9,000 Advantest Corp 508,576 15,000 Anritsu Corp 171,514 37,100 Fanuc Co 1,152,747 1,000 Hosiden Corp * 6,885 10,000 Japan Aviation Electronics 58,497 7,000 Jeol 41,412 58,000 Kenwood Corp 247,494 20,000 Kyocera Corp 1,184,854 9,000 Matsushita Kotubuki 257,271 10,000 Nichicon Corp 115,171 33,000 Tokyo Electron 1,153,865 338,000 Toshiba Corp 1,904,383 6,000 Uniden Corp 64,628 -------------------- 6,867,297 --------------------
4 See accompanying notes to the financial statements. GMO Japan Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------------------- Financial Services - 1.9% 72,000 Kankaku Securities Co Ltd * 141,984 46,000 Mitsui Trust & Banking Co Ltd 284,332 6,000 New Japan Securities Co Ltd * 18,444 35,000 Nippon Shinpan Co Ltd 147,900 206,000 Nomura Securities Co Ltd 2,748,032 41,000 Orient Corp 183,105 1,000 Orix Corp 42,257 4,000 Sanyo Securities Co Ltd * 8,982 160,000 Yamaichi Securities Co Ltd 554,147 -------------------- 4,129,183 -------------------- Food and Beverage - 2.4% 99,000 Asahi Breweries Ltd 959,732 3,300 Denny's Japan Co Ltd 84,763 14,000 Katokichi Co Ltd 225,023 200,000 Kirin Brewery Co Ltd 1,706,852 23,000 Mercian Corp 131,875 35,000 Nippon Meat Packers Inc 350,899 83,000 Nippon Suisan Kaisha Ltd * 220,756 11,000 Nissin Food Products Co Ltd 210,539 26,700 Q.P. Corp 201,317 59,000 Sapporo Breweries Ltd 436,548 48,000 Snow Brand Milk Products Co Ltd 233,458 37,000 Takara Shuzo Co Ltd 223,183 23,000 Yamazaki Baking Co Ltd 344,933 -------------------- 5,329,878 -------------------- Health Care - 3.8% 46,000 Daiichi Seiyaku Co Ltd 750,849 61,000 Eisai Co Ltd 1,142,265 22,000 Green Cross Corp 91,143 25,000 Hoya Corp 1,064,711 60,000 Kyowa Hakko Kogyo Co Ltd 398,210 69,000 Lion Corp 288,715 106,000 Sankyo Co Ltd 2,951,032 50,000 Shionogi and Co Ltd 311,128 96,000 Shiseido Co Ltd 1,121,551 9,000 Unicharm Corp 231,171 -------------------- 8,350,775 -------------------- Insurance - 0.1% 2,000 Chiyoda Fire & Marine Insurance Co Ltd 8,451 21,000 Dai Tokyo Fire & Marine Insurance Co Ltd 106,140 22,000 Nichido Fire & Marine Insurance Co Ltd 122,496 8,000 Sumitomo Marine & Fire Insurance Co Ltd 46,267 ------------------ 283,354 ------------------
See accompanying notes to the financial statements. 5 GMO Japan Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------------------ Leisure - 0.3% 37,000 Tokyo Dome Corp 508,907 49,000 Tokyotokeiba Co Ltd 133,980 -------------------- 642,887 -------------------- Machinery - 3.2% 10,000 Aida Engineering Ltd 65,291 33,000 Aisin Seiki Co Ltd 462,093 144,000 Amada Co Ltd 1,051,156 10,000 Amano Corp 100,257 19,000 Daifuku Ltd 223,548 20,000 Daikin Industries Ltd 156,765 30,000 Ebara Corp 377,827 26,000 Furukawa Co Ltd 86,171 81,000 Komatsu Ltd 604,027 8,000 Komori Corp 167,040 27,000 Koyo Seiko Co Ltd 200,671 148,000 Kubota Corp 673,229 3,000 Kurita Water Industries Ltd 63,386 15,000 Makino Milling Machine Co Ltd 105,270 34,000 Minebea Co Ltd 281,150 10,000 Mori Seiki Co Ltd 134,228 28,000 NHK Spring Co Ltd 99,760 34,000 Niigata Engineering Co Ltd * 66,484 8,000 Nippon Piston Ring Co Ltd 24,128 178,000 NSK Ltd 1,020,598 42,000 Okuma Corp 347,999 3,000 Sanden Corp 24,111 88,000 The Japan Steel Works Ltd * 185,202 8,000 Toshiba Tungaloy Co Ltd 35,794 15,000 Toyo Kanetsu (KK) 43,873 17,000 Toyoda Automatic Loom Works 294,391 3,000 Tsubakimoto Chain 15,635 9,000 Tsugami Corp 21,477 -------------------- 6,931,561 -------------------- Manufacturing - 0.2% 29,000 Iwatani & Co 105,725 17,000 Nippon Electric Glass Co 233,822 61,000 Ube Industries 170,329 -------------------- 509,876 -------------------- Metals and Mining - 2.0% 29,000 Fujikara Ltd 227,310 34,000 Hitachi Metals Ltd 236,639 33,000 Hitachi Zosen Corp 132,066 14,000 Japan Metals & Chemicals * 35,728
6 See accompanying notes to the financial statements. GMO Japan Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------------------- Metals and Mining - continued 18,000 Kawasaki Steel 48,173 448,000 Mitsubishi Materials Corp 1,662,971 33,000 Mitsui Mining Co Ltd * 88,044 48,000 Mitsui Mining & Smelting Co Ltd 184,539 46,000 Nippon Light Metal 163,510 70,000 Nippon Sheet Glass Co Ltd 223,299 24,000 Nitto Denko Corp 320,159 7,000 Sumitomo Coal Mining Co Ltd 23,896 85,000 Sumitomo Metal Mining 588,077 2,000 Sumitomo Sitix Corp 36,623 5,000 Toho Zinc Co 21,336 19,000 Tokai Carbon Co Ltd 67,222 4,000 Tokyo Steel Manufacturing Co 44,080 13,000 Toyo Seikan Kaisha Ltd 304,831 -------------------- 4,408,503 -------------------- Oil and Gas - 4.0% 12,900 Arabian Oil Co Ltd 411,509 194,000 Cosmo Oil Co Ltd 755,489 86,000 General Sekiyu (KK) 520,176 381,000 Japan Energy Co Ltd 896,545 170,000 Mitsubishi Oil Co Ltd 707,101 606,000 Nippon Oil Co Ltd 2,555,754 98,600 Showa Shell Sekiyu 736,089 119,000 Teikoku Oil Co Ltd 560,046 149,000 Toa Nenryo Kogyo (KK) 1,506,173 -------------------- 8,648,882 -------------------- Paper and Allied Products - 0.6% 28,000 Daishowa Paper Manufacturing * 112,520 5,000 Hokuetsu Paper Mills 24,857 37,000 Mitsubishi Paper Mills Ltd 137,344 133,000 New Oji Paper Co Ltd 740,542 15,000 Nippon Paper Industries 70,346 12,000 Sumitomo Forestry Co Ltd 137,211 -------------------- 1,222,820 -------------------- Pharmaceuticals - 4.0% 41,000 Chugai Pharmaceutical Co Ltd 323,747 33,000 Dainippon Pharmaceutical Co Ltd 236,242 117,000 Fujisawa Pharmaceutical Co Ltd 1,017,897 10,000 Kaken Pharmaceutical Co Ltd 51,620 11,000 Kissei Pharmaceutical Co Ltd 219,654 10,000 Mochida Pharmaceutical Co Ltd 83,685
See accompanying notes to the financial statements. 7 GMO Japan Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- Pharmaceuticals - continued 25,000 Nippon Kayaku Co Ltd 143,135 8,000 Ono Pharmaceutical Co Ltd 257,188 60,000 Taisho Pharmaceutical Co Ltd 1,382,053 154,000 Takeda Chemical Industries Ltd 3,087,911 54,000 Terumo Corp 787,472 7,000 Tsumura and Co 43,500 49,000 Yamanouchi Pharmaceutical Co Ltd 1,023,117 16,000 Yoshitomi Pharmaceutical Industries Ltd 108,973 -------------------- 8,766,194 -------------------- Primary Processing - 0.4% 18,000 Daido Steel Co Ltd 54,586 51,000 Nippon Yakin Kogyo Co Ltd 114,939 62,000 Nisshin Steel Co Ltd 147,949 246,000 Sumitomo Metal Industries Ltd 587,025 -------------------- 904,499 -------------------- Real Estate - 1.8% 36,000 Daikyo Inc 135,720 14,000 Daiwa Kosho Lease Co Ltd 110,200 12,000 Heiwa Real Estate Co Ltd 61,646 160,000 Mitsubishi Real Estate Co Ltd 1,882,509 99,000 Mitsui Fudosan Co Ltd 1,074,571 49,000 Sumitomo Realty and Development Co Ltd 343,881 43,000 Tokyo Tatemono Co Ltd 187,049 56,000 Tokyo Land Corp * 192,559 -------------------- 3,988,135 -------------------- Retail Trade - 3.0% 5,000 Aoki International 91,143 9,000 Aoyama Trading 225,951 5,940 Familymart 228,367 25,000 Hankyu Department Stores Inc 223,714 46,000 Isetan Co Ltd 503,107 27,000 Joshin Denki Co Ltd 243,848 46,000 Jusco Co 1,303,505 93,000 Marui Co Ltd 1,333,085 19,000 Matsuzakaya Co Ltd 155,539 34,000 Nagasakiya Co Ltd * 96,909 75,000 Nichii Co Ltd 963,212 8,000 Sanrio Co Ltd * 50,377 45,000 Takashimaya Co 495,899 41,000 UNY Co Ltd 723,589 -------------------- 6,638,245 --------------------
8 See accompanying notes to the financial statements. GMO Japan Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- Services - 6.1% 41,800 Canon Sales Co Inc 810,440 22,800 CSK Corp 542,182 145,000 Dainippon Printing Co Ltd 2,414,865 10,000 Hanwa Co Ltd * 27,094 4,000 Intec Inc 47,394 75,000 Itochu Corp 369,128 74,000 Kamigumi Co Ltd 389,958 4,000 Kokusai Kogyo Co Ltd 33,143 47,000 Kokuyo Co Ltd 1,004,723 7,000 Konami Co Ltd 200,679 13,000 Kyodo Printing Co Ltd 96,619 173,000 Marubeni Corp 676,576 27,000 Mitsubishi Warehouse & Transportation Co Ltd 313,199 21,000 Mitsui-Soko Co Ltd 116,406 189,000 Nissho Iwai Corp 712,528 20,000 Okamoto Industries Inc 82,525 25,000 Secom Co Ltd 1,408,567 25,900 Sega Enterprises 725,346 16,000 Seiko Corp 95,319 172,000 Sumitomo Corp 1,292,601 24,000 Sumitomo Warehouse Co Ltd 122,297 157,000 Toppan Printing Co Ltd 1,808,186 15,000 Toshiba Ceramics Co Ltd 116,828 -------------------- 13,406,603 -------------------- Technology - 6.2% 35,000 Dainippon Screen Manufacturing Co Ltd 282,459 260,000 Fujitsu Ltd 2,563,593 350,000 Hitachi Ltd 3,015,991 17,000 Makita Corp 233,822 6,300 Murata Manufacturing Co Ltd 220,805 182,000 NEC Corp 2,111,194 10,000 Omron Corp 157,428 25,000 Rohm Co Ltd 1,791,781 28,000 Shimazu Corp 138,736 56,000 Taiyo Yuden Co Ltd 654,238 36,000 TDK Corp 2,410,142 -------------------- 13,580,189 -------------------- Telecommunications - 0.7% 14,000 Gakken Co Ltd 63,220 2,000 Nippon Television Network 594,913 9,000 Nitsuko Corp 59,881 58,000 Tokyo Broadcasting System Inc 840,998 -------------------- 1,559,012 --------------------
See accompanying notes to the financial statements. 9 GMO Japan Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- Textiles - 1.2% 13,000 Fuji Spinning Co Ltd 45,455 14,000 Japan Wool Textile 87,348 47,000 Kurabo Industries Ltd 117,607 11,000 Kuraray Co 91,143 63,000 Nisshinbo Industries Inc 454,139 69,000 Onward Kashiyama Co Ltd 846,135 95,000 Renown Inc * 188,914 27,000 Tokyo Style Co Ltd 308,725 41,000 Tokyu Department Store Co Ltd 137,584 40,000 Wacoal Corp 404,342 -------------------- 2,681,392 -------------------- Tobacco - 0.6% 210 Japan Tobacco Inc 1,409,396 -------------------- Transportation - 5.6% 338 East Japan Railway Co 1,439,490 12,000 Fujita Kanko Inc 132,240 32,000 Fukuyama Transporting Co Ltd 221,924 191,000 Hankyu Corp 916,306 54,000 Japan Airport Terminal Co Ltd 550,336 70,000 Kawasaki Kisen * 142,680 91,000 Keihin Electric Express Railway Co Ltd 392,833 74,000 Keio Teito Electric Railway Co Ltd 337,228 29,000 Keisei Electric Railway Co Ltd 168,440 260,000 Kinki Nippon Railway Co Ltd 1,561,853 91,000 Nagoya Railroad Co Ltd 336,283 9,300 Namco Ltd 262,764 53,000 Nankai Electric Railway Co Ltd 259,094 125,000 Nippon Express Co Ltd 804,748 115,000 Odakyu Electric Railway Co Ltd 591,723 13,000 Royal Co Ltd 219,737 29,000 Seibu Railway Co Ltd 1,239,871 39,000 Seino Transportation Co Ltd 387,770 20,000 Skylark Co Ltd 288,342 99,000 Tobu Railway Co Ltd 442,953 28,000 Toei Co Ltd 174,464 2,300 Toho Co Ltd 301,102 127,000 Tokyu Corp 594,540 39,000 Yamato Transport Co Ltd 384,539 -------------------- 12,151,260 --------------------
See accompanying notes to the financial statements. 10 GMO Japan Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- Utilities - 4.3% 23,700 Chugoku Electric Power Co Inc 410,415 7,000 Kokusai Denshin Denwa 417,599 35,500 Kyushu Electric Power Co Inc 614,757 1,056 Nippon Telegraph & Telephone 7,515,983 26,400 Tohoku Electric Power Co Inc 452,796 -------------------- 9,411,550 -------------------- TOTAL STOCK AND EQUIVALENTS (Cost $240,801,673) 193,619,738 -------------------- Par Value($)/ SHORT-TERM INVESTMENTS - 19.1% Shares Cash Equivalents - 17.7% $ 600,000 Republic Bank of New York Time Deposit, 5.34% due 3/3/97 600,000 38,170,377 The Boston Global Investment Trust (b) 38,170,377 -------------------- 38,770,377 -------------------- U.S. Government - 1.4% $ 3,200,000 U.S. Treasury Bill, 5.56% due 1/8/98 (a) 3,053,761 -------------------- TOTAL SHORT-TERM INVESTMENTS (Cost $41,825,839) 41,824,138 -------------------- TOTAL INVESTMENTS - 107.6% (Cost $282,627,512) * * 235,443,876 Other Assets and Liabilities (net) - (7.6%) (16,646,952) -------------------- TOTAL NET ASSETS - 100.0% $ 218,796,924 ====================
Notes to the Schedule of Investments: (a) This security is held as collateral for open futures contracts. (b) Represents investment of security lending collateral (Note 1). * Non-income producing security. A dividend has not been declared for the year ended February 28, 1997. * * The aggregate identified cost for federal income tax purposes is $282,691,319, resulting in gross unrealized appreciation and depreciation of $5,338,154 and $52,585,597, respectively, and net unrealized depreciation of $47,247,443. See accompanying notes to the financial statements. 11 GMO Japan Fund (A Series of GMO Trust) Statement of Assets and Liabilities - February 28, 1997 - -------------------------------------------------------------------------------- Assets: Investments, at value (cost $282,627,512) (Note 1) $ 235,443,876 Foreign currency, at value (cost $21,823,465) (Note 1) 21,192,287 Cash 69,705 Receivable for Fund shares sold 800,000 Dividends and interest receivable 116,084 Receivable for expenses waived or borne by Manager (Note 2) 82,872 ----------------- Total assets 257,704,824 ----------------- Liabilities: Payable upon return of securities loaned (Note 1) 38,170,377 Payable for Fund shares repurchased 20,000 Payable for variation margin on open futures contracts (Notes 1 and 6) 446,543 Payable to affiliate for (Note 2): Management fee 59,080 Shareholder service fee 24,512 Accrued expenses 187,388 ----------------- Total liabilities 38,907,900 ----------------- Net assets $ 218,796,924 ================= Net assets consist of: Paid-in capital $ 267,726,217 Distributions in excess of net investment income (564,380) Accumulated net realized loss (103,886) Net unrealized depreciation (48,261,027) ----------------- $ 218,796,924 ================= Net assets attributable to Class III Shares $ 218,796,924 ================= Shares outstanding - Class III 31,179,725 ================= Net asset value per share - Class III $ 7.02 ==================
12 See accompanying notes to the financial statements. GMO Japan Fund (A Series of GMO Trust) Statement of Operations - Year Ended February 28, 1997 - -------------------------------------------------------------------------------- Investment income: Dividends (net of foreign tax expense of $174,052) $ 1,126,123 Interest (including securities lending income of $135,429) 357,027 --------------- Total income 1,483,150 --------------- Expenses: Management fee (Note 2) 1,566,406 Custodian fees 211,668 Audit fees 61,806 Registration 43,385 Transfer agent fees 30,260 Stamp duties and transfer taxes 13,261 Legal fees 10,259 Trustees fee (Note 2) 997 Miscellaneous 2,264 Fees waived or borne by Manager (Note 2) (742,507) --------------- 1,197,799 Shareholder service fee - Class III (Note 2) 261,357 --------------- Net expenses 1,459,156 --------------- Net investment income 23,994 --------------- Realized and unrealized gain (loss): Net realized gain (loss) on: Investments 871,291 Closed futures contracts (834,583) Foreign currency and foreign currency related transactions (1,955,083) --------------- Net realized loss (1,918,375) --------------- Change in net unrealized appreciation (depreciation) on: Investments (46,198,193) Open futures contracts (111,788) Foreign currency and foreign currency related transactions (398,960) --------------- Net unrealized loss (46,708,941) --------------- Net realized and unrealized loss (48,627,316) --------------- Net decrease in net assets resulting from operations $ (48,603,322) ===============
See accompanying notes to the financial statements. 13 GMO Japan Fund (A Series of GMO Trust) Statement of Changes in Net Assets - --------------------------------------------------------------------------------
Year Ended February 28, 1997 February 29, 1996 ------------------- ------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) $ 23,994 $ (109,844) Net realized gain (loss) (1,918,375) 4,140,734 Change in net unrealized appreciation (depreciation) (46,708,941) 1,050,216 ------------------- ------------------- Net increase (decrease) in net assets resulting from operations (48,603,322) 5,081,106 ------------------- ------------------- Distributions to shareholders from: In excess of net investment income - Class III (36,409) - Net realized gains - Class III - (12,090,051) ------------------- ------------------- (36,409) (12,090,051) ------------------- ------------------- Net share transactions - Class III (Note 5) 141,329,696 72,992,741 ------------------- ------------------- Total increase in net assets 92,689,965 65,983,796 Net assets: Beginning of period 126,106,959 60,123,163 ------------------- ------------------- End of period (including distributions in excess of net investment income of $564,380 and $189,728, respectively) $ 218,796,924 $ 126,106,959 =================== ===================
14 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, ---------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------ ----------- ----------- --------- ---------- Net asset value, beginning of period $ 8.52 $ 9.12 $ 11.13 $ 7.37 $ 7.73 ------------ ----------- ----------- --------- ---------- Income (loss) from investment operations: Net investment income (loss) - (d) (0.01)(d) - (d) - 0.01 Net realized and unrealized gain (loss) (1.50) 0.79 (1.08) 3.94 (0.36) ------------ ----------- ----------- --------- ---------- Total from investment operations (1.50) 0.78 (1.08) 3.94 (0.35) ------------ ----------- ----------- --------- ---------- Less distributions to shareholders: From net investment income - - - - (0.01) In excess of net investment income (0.00) - - (0.01) - From net realized gains - (1.38) (0.93) (0.17) - ------------ ----------- ----------- --------- ---------- Total distributions (0.00) (1.38) (0.93) (0.18) (0.01) ------------ ----------- ----------- --------- ---------- Net asset value, end of period $ 7.02 $ 8.52 $ 9.12 $ 11.13 $ 7.37 ============ =========== =========== ========= ========== Total Return (a) (17.69%) 8.29% (10.62%) 53.95% (4.49%) Ratios/Supplemental Data: Net assets, end of period (000's) $ 218,797 $ 126,107 $ 60,123 $ 450,351 $ 306,423 Net expenses to average daily net assets 0.70%(e) 0.92% 0.83% 0.87% 0.88% Net investment income (loss) to average daily net assets 0.01% (0.13%) (0.02%) (0.01%) 0.12% Portfolio turnover rate 4% 23% 60% 8% 17% Average broker commission rate per equity share (b) $ 0.0066 N/A N/A N/A N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.03 $ 0.01 (c) $ 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) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. (c) Fees and expenses waived or borne by the Manager were less than $.01 per share. (d) Based on average month end shares outstanding. (e) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .01% of average daily net assets. See accompanying notes to the financial statements. 15 GMO Japan Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1997 - -------------------------------------------------------------------------------- 1. Significant accounting policies The 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 into classes. The Fund seeks maximum total return through investment in Japanese securities, primarily in common stocks of Japanese companies. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. At February 28, 1997, Class III was the only active class of shares of the Fund. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges. 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 16 GMO Japan Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 net exchange gains and losses on disposition of foreign currencies, 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 Japanese futures contracts. Japanese futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a specified price 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 instruments or hedge other Fund instruments. Upon purchase of 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 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 accumulation in commitment 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 held as of February 28, 1997. 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 28, 1997, the Fund loaned securities having a market value of $35,850,851, collateralized by cash in the amount of $38,170,377, which was invested in a short-term instrument. 17 GMO Japan Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 taxable 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 federal income tax purposes. Therefore, no provision for 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 present policy is to declare and pay distributions from net investment income, if any, semi-annually, and from net realized short-term and long-term capital gains, if any, 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. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to the differing treatments for foreign currency transactions. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Undistributed Net Investment Income Accumulated Net Realized Gain/(Loss) Paid-in Capital -------------------------------------------- -------------------------------------- ------------------------------ ($362,237) $1,942,252 ($1,580,015)
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. 18 GMO Japan Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 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 in such manner as deemed equitable by the Trustees, 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 based on the 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 .40% of the amount invested. In the case of cash redemptions, the fee is .61% of the amount redeemed. Prior to June 1, 1996, the redemption fee was .70% of the amount redeemed. The Manager may waive such premium or fee to the extent that a transaction results in minimal brokerage and transaction costs to the Fund. All purchase premiums and redemption fees are paid to and recorded as paid-in capital by the Fund. For the year ended February 28, 1997 the Fund received $693,765 in purchase premiums and no redemption fees. There is no premium for 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 and the possible imposition of currency exchange blockages 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. 2. Fees and other transactions with affiliates GMO earns a management fee paid monthly at the annual rate of .75% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice to the extent that the Fund's annual expenses (including management fee but excluding brokerage 19 GMO Japan Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceed .54% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .69%; thus, the net annual expense ratio after the waiver for a Class III shareholder is unchanged. Additionally, effective March 14, 1996, the waiver was adjusted to include custodian fees. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997, was $997. 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 28, 1997, aggregated $148,200,376 and $8,265,787, respectively. 4. Principal shareholders At February 28, 1997, 26% 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:
Class III: Year Ended Year Ended February 28, 1997 February 29, 1996 -------------------------------------- --------------------------------------- Shares Amount Shares Amount ----------------- ----------------- ----------------- ----------------- Shares sold 22,172,884 $ 188,630,734 8,808,517 $ 79,871,616 Shares issued to shareholders in 12,090,051 reinvestment of distributions 3,661 28,076 1,394,470 Shares repurchased (5,789,470) (47,329,114) (2,001,579) (18,968,926) ----------------- ----------------- ----------------- ----------------- Net increase 16,387,075 $ 141,329,696 8,201,408 $ 72,992,741 ================= ================= ================= =================
20 GMO Japan Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 6. Financial instruments A summary of outstanding futures contracts purchased at February 28, 1997 is as follows:
Number of Net Unrealized Contracts Type Expiration Date Contract Value Depreciation ---------------- --------------------- ------------------------- ------------------ ----------------- 160 TOPIX March 1997 $ 18,480,404 $ (446,543)
21 GMO Japan Fund (A Series of GMO Trust) Federal Income Tax Information on Distributions -- (Unaudited) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all the Fund's distributions are from investment company taxable income. At February 28, 1997, the Fund had a capital loss carryforward available to offset future capital gains, if any, of the following amount:
Year of Expiration Amount ------------------ ------ 2005 $ 43,013
The Fund has also elected to defer to March 1, 1997 post-October losses of $561,446. 22 [THIS PAGE INTENTIONALLY LEFT BLANK] 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 nine years. Management Discussion and Analysis of Fund Performance - ------------------------------------------------------ The Class III shares of the GMO Japan Fund's performance outpeformed the MSCI Japan index for the fiscal year ended February 28, 1997, with a total return of - -17.7% versus -20.5% for the MSCI Japan index. Consistent with the Fund's investment objective and policies, the Fund was invested substantially in common stocks throughout the period. Value stocks outperformed during the year while small capitalization stocks underperformed, with a resulting mixed impact on performance. During the fiscal year, GMO's stock selection model tended to underweight bank stocks while overweighting exporters such as consumer goods, durable goods and technology. Stocks selected using the Fund's style momentum model, which emphasizes factors which are currently working well in the markets, added significant value as well. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co LLP 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 28, 1997 Average Annual Total Return
Since Inception 1 Year 5 Year 06/08/90 Class III -18.5% 3.0% -1.4%
[Line Graph Appears Here]
Date GMO Japan Fund MSCI Japan Index 06/08/90 9,960 10,000 02/28/91 9,582 9,615 02/29/92 7,816 7,904 02/28/93 7,465 7,387 02/28/94 11,492 10,826 02/28/95 10,271 9,701 02/29/96 11,136 10,565 02/28/97 9,110 8,401
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 40 bp on the purchase and 61 bp on the redemption. Transaction fees are paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Class I shares and Class II shares have not commenced operations. Past performance is not indicative of future performance. Information is unaudited. GMO International Small Companies Fund (A Series of GMO Trust) Annual Report February 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 17, 1997 GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------------------- STOCK AND EQUIVALENTS - 92.9% Australia - 2.3% 99,491 Australian Gas & Light 569,148 162,835 Burns Philp & Co Ltd 252,785 91,800 Caltex Australia Ltd 309,960 89,342 Email Ltd 282,243 438,840 Goodman Fielder Ltd 531,379 101,875 Hardie (James) Industries Ltd 292,579 25,355 Pacific Magazines and Printing Ltd 63,962 266,000 Pasminco Ltd 495,526 52,800 Publishing & Broadcasting Ltd 264,343 254,387 QCT Resources Ltd 351,470 252,887 Santos Ltd 910,790 96,500 Seven Network Ltd 319,837 189,800 Southcorp Holdings Ltd 671,792 ------------------ 5,315,814 ------------------ Austria - 1.9% 888 Allgemeine Baugesellschaft AG Preferred 7.00% 32,587 777 Allgemeine Baugesellschaft AG * 69,975 800 Austrian Airlines * 119,180 11,700 Bank Austria AG (Participating Certificate) 344,662 700 Bau Holding AG Preferred 2.42% (Non Voting) 33,582 1,150 Brau Union AG 64,850 200 BWT AG 20,957 2,800 Creditanstalt-Bankverein 172,036 1,200 Creditanstalt-Bankverein Preferred 1.65% 45,945 100 EA-Generali AG 27,775 1,100 EA-Generali AG Preferred 6.00% 114,525 600 EVN Energie-Versorgung Niederoesterreich AG 88,324 2,300 Flughafen Wien AG 115,182 5,500 Jenbacher Werke AG 159,706 200 Lenzing AG 9,629 300 Leykam-Muerztaler Papier und Zellstoff AG 8,358 800 Miba Holding AG Class B Preferred 1.34% 34,744 7,000 OEMV AG 824,833 1,100 Oesterreichische Brau Beteiligungs AG 67,586 3,000 Oesterreichische Elektrizitaetswirtschafts AG 217,907 7,200 Oesterreichische Laenderbank AG 492,678 700 Oesterreichische Laenderbank AG Preferred (Non Voting) 24,568 110 Perlmooser Zementwerke AG 5,694 18,658 Radex-Heraklith AG 676,755 300 RAS Versicherungs AG 37,092 2,400 Steyr-Daimler-Puch AG * 42,420 1,942 Strabag Oesterreich AG 112,945 3,662 Universale Bau AG 144,862 1,700 VA Technologie AG (Bearer) 256,419 200 Wiener Allianz Versicherungs AG 22,725 ------------------ 4,388,501 ------------------
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 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------------------- Canada - 3.7% 6,000 Abitibi-Price Inc 98,983 1,000 Agnico Eagle Mines Ltd 14,302 2,200 Air Canada Inc * 11,105 19,200 Anderson Exploration Ltd * 228,254 5,000 Avenor Inc 86,144 1,400 BCE Mobile Communications * 44,553 700 Bombardier Inc Class A 13,392 2,800 Brascan Ltd Class A (Convertible) 67,086 10,600 CAE Industries Inc 88,404 1,400 Cambior Inc 22,430 18,900 Cameco Corp 704,481 6,600 Canadian Airlines Corp * 7,098 3,100 Canadian Marconi Co 39,348 38,300 Canadian Tire Ltd Class A 697,688 1,200 Canfor Corp 12,730 3,400 CCL Industries Class B 39,549 21,900 Cominco Ltd 624,845 9,600 Corel Corp * 62,506 3,100 Co-Steel Inc 51,028 2,000 Cott Corp * 19,680 9,200 Dofasco Inc 166,581 18,100 Dominion Textile Inc 84,747 24,400 Domtar Inc 222,240 6,700 Donohue Inc Class A 128,912 16,200 Echo Bay Mines Ltd * 125,627 8,600 Elan Energy Inc * 69,208 400 Extendicare (Voting Shares) * 5,384 5,700 Fletcher Challenge Canada Class A 94,659 13,000 Gulf Canada Resources Ltd * 91,301 6,400 Hudsons Bay Co 128,056 100 Inco Ltd Class VBN Shares 2,411 13,000 Inmet Mining Ltd * 87,497 13,900 Inter-City Products Corp * 58,980 5,500 International Forest Products A * 40,237 6,000 IPL Energy Inc 175,360 9,400 Ipsco Inc 271,637 1,100 Laidlaw Inc Class A 15,089 13,200 Macmillan Bloedel Ltd 182,515 25,500 Methanex Corp * 249,982 10,100 Mitel Corp * 56,895 15,300 Molson Co Ltd, Class A 266,398 2,900 Molson Co Ltd, Class B 50,918 12,000 Moore Corporation Ltd 265,125 800 Noma Industries Ltd Class A 2,429 11,300 Noranda Forest Inc 78,535 8,500 Noranda Inc 204,898 1,700 Norcen Energy Resource 36,378 30,100 Nova Scotia Power Inc 311,592
2 See accompanying notes to the financial statements. GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------------------- Canada - continued 300 Numac Energy Inc * 1,372 15,800 Oshawa Group Ltd Class A 236,382 1,100 Pegasus Gold Inc * 9,456 10,600 Power Corp of Canada Ltd 224,888 9,600 Provigo Inc * 39,681 4,900 Quebecor Inc Class B 89,977 7,600 Ranger Oil Ltd 68,666 5,900 Repap Enterprises Inc * 10,446 1,200 Rio Algom Ltd 30,507 2,000 Rogers Cantel Mobile Communications Class B * 33,653 12,800 Rogers Communications Inc Class B * 87,556 6,500 Royal Oak Mines * 22,350 10,200 Sears Canada Inc 98,127 10,700 Semi-Tech Class A 21,527 4,880 Slocan Forest Products Ltd 52,481 1,400 Southam Inc 21,611 700 Spar Aerospace Ltd 7,707 5,100 Stelco Inc Class A * 27,983 6,200 Suncor Inc 276,231 2,100 Teck Corp Class B 51,313 100 Tele Metropole Inc Class B * 1,353 12,400 Telus Corp 187,783 1,000 Torstar Corp Class B 26,776 6,600 Total Petroleum North America 67,598 17,700 Transalta Corp 210,421 25,600 TVX Gold Inc * 227,551 1,600 United Dominion Inds Ltd 43,251 11,400 Westcoast Energy Inc 207,250 700 Weston George Ltd 38,357 ------------------ 8,829,451 ------------------ Denmark - 0.0% 800 Hafnia Holdings Class A (b) * 1 ------------------ Finland - 3.2% 11,900 Amer Group Class A 249,350 25,000 Cultor OY Class 1 1,514,429 79,000 Kesko OY 1,153,250 63,700 Partek OY 1,053,886 132,400 Rautaruukki OY 1,246,452 125,200 Valmet OY 2,275,279 ------------------ 7,492,646 ------------------ France - 0.4% 120 Accor SA 16,513 300 Bertrand Faure SA 14,949 180 BIC SA 29,193
See accompanying notes to the financial statements. 3 GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------------------- France - continued 25 Bongrain 9,689 360 Bouygues 34,374 400 Cap Gemini SA * 23,955 750 Casino Guichard-Perrachon 34,227 190 Castorama Dubois Investment 28,647 220 CEP Communications SA (Bearer) 18,149 80 CGIP 22,818 70 Clarins 9,706 220 Club Mediterranee SA 16,894 70 Comptoirs Modernes 34,636 140 Eridania Beghin-Say SA 22,632 130 Essilor International 35,687 7,600 Euro Disney SCA (Bearer) * 13,940 10,400 Eurotunnel SA Units (Bearer) * 12,869 15 Fromageries Bel La Vache 11,719 30 Gaz Et Eaux 13,269 30 Guyenne Et Gascogne 10,321 250 Havas 19,746 70 Hermes International 19,007 170 Imetal 24,468 1,675 Lagardere Groupe 49,392 150 Pathe SA 37,597 830 Pechiney SA Class A 35,095 700 Pernod-Ricard 38,211 230 Primagaz 23,616 30 Sagem Applic Gen D Electric 16,534 100 Saint Louis 26,258 190 Salomon SA 13,050 130 Seb SA 24,415 1,030 Seita 39,412 220 Sidel (Bearer) 16,102 70 Sodexho Alliance 38,948 120 Sylea (Bearer) 11,584 180 Technip SA (Compagnie Francaise) 18,198 700 Thomson CSF 22,177 280 TV Francaise 25,949 3,500 Usinor Sacilor 54,061 360 Worms et Compagnie SA 24,011 ------------------ 992,018 ------------------ Germany - 2.6% 2,100 AGIV AG * 34,706 200 Ava Allgemeine Handelsgesellschaft der Verbraucher AG * 54,259 550 Bayerische Motorenwerke AG 370,098 250 Berliner Kraft und Licht AG Class A 69,897 2,400 Bilfinger & Berger 96,671 150 Brau und Brunnen * 12,528 7,600 Continental AG 148,110 300 Degussa 127,947
4 See accompanying notes to the financial statements. GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------------------- Germany - continued 550 Deutsche Babcock & Wilcox * 24,760 150 Didier-Werke AG 12,262 900 Douglas Holdings AG 31,720 100 Draegerwerk AG Preferred 1,428 50 Dyckerhoff AG (Non Voting) 15,845 50 Dyckerhoff AG 19,547 2,000 FAG Kugelfischer 30,565 150 Friedrich Grohe AG Preferred (Non Voting) 41,583 1,800 Friedrich Krupp AG 287,667 150 GEA AG Preferred 3.13% 51,356 3,050 Heidelberg Port-Zement 251,125 1,100 Henkel KGAA Preferred 58,642 850 Henkel KGAA (Bearer) 43,502 150 Herlitz AG Preferred 13,905 100 Herlitz AG 9,714 2,450 Hochtief AG 106,667 100 Holsten-Brauerei 19,488 200 Holzmann (Philipp) * 60,538 250 Ind-Werke Karl-Aug 57,680 450 Karstadt AG 147,139 250 Kaufhalle AG * 25,323 2,900 Klockner Humboldt Deutz * 14,430 300 Klockner-Werke AG * 18,837 1,450 Kolbenschmidt * 23,104 50 Krones Preferred 17,178 250 Leirheit AG 8,293 550 Linde AG 358,370 150 Linotype Hell AG * 10,662 14,250 Lufthansa AG 189,077 800 MAN AG 204,478 300 MAN AG Preferred 63,885 250 Metro AG Preferred 16,364 1,400 Metro AG 122,734 300 Papierwerke Waldhof 43,360 1,350 Phoenix AG 19,752 750 Preussag AG 192,587 150 Reutgerswerke AG * 21,147 6,100 Schering AG 553,199 300 Schmalbach-Lubeca 61,486 200 Strabag Bau AG * 17,379 100 TH Goldschmidt AG 36,726 1,850 Thyssen AG 392,427 100 Varta AG * 16,586 1,500 Viag AG 662,392 250 Villeroy and Boch AG 33,764 1,000 Volkswagen AG 484,540 550 Volkswagen AG Preferred .79% 209,483 ------------------ 6,016,912 ------------------
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 28, 1997
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------- Hong Kong - 7.4% 2,856,000 Allied Properties Ltd 523,698 102,000 Amoy Properties Ltd 121,836 129,000 Asia Financial Holdings 46,643 196,000 Asia Standard International Group Ltd 64,540 102,000 ASM Pacific Technology 84,956 250,000 Associated International Hotels 172,714 256,000 Chinese Estates Holdings Ltd 272,727 143,000 Cross Harbour Tunnel Co Ltd 312,997 258,666 Dickson Concept International Ltd 943,610 11,214 Evergo China Holdings * 1,752 118,580 Furama Hotel Enterprises Ltd 199,063 218,000 Grand Hotel Holdings Ltd Class A 97,824 270,000 Great Eagle Holdings Ltd 1,012,849 624,000 Hang Lung Development Co Ltd 1,257,025 265,000 Henderson Investment Ltd 297,714 126,300 Hongkong Aircraft Engineering Co Ltd 400,396 245,000 Hysan Development Co Ltd 858,955 13,000 IMC Holdings 6,043 84,000 Jardine International Motor Holdings Ltd 108,471 113,937 Jardine Strategic Warrants 5/02/98 * 38,739 22,000 Johnson Electric Holdings Ltd 60,795 106,800 Kowloon Motor Bus Co Ltd 214,455 353,000 Kumagai Gumi Hong Kong Ltd 403,416 283,000 Kwong Sang Hong International Ltd 159,882 944,400 Lai Sun Development 1,414,649 278,000 Lai Sun Garment International Ltd 405,656 292,000 Liu Chong Hing Investment Ltd 363,869 80,620 Mandarin Oriental 109,643 1,134,000 Mingly Corp 413,682 146,000 New Asia Realty & Trust A Shares 530,721 340,000 Oriental Press Group 141,593 12,800 Oriental Press Group Warrants 10/2/98 * 686 667,000 Pacific Concord Holdings Ltd 239,014 35,100 Realty Development Corp Ltd Class A 135,296 3,406,509 Regal Hotels International Ltd 1,011,747 1,062,000 Ryoden Development 305,133 92,000 Semi Tech (Global) Co Ltd 106,921 132,000 Shell Electric Co Ltd 86,080 112,000 Shun Tak Holdings Ltd 79,545 1,770,000 South China Morning Post Ltd 1,588,520 21,595 Stelux Holdings International 4,713 460,000 Swire Pacific Ltd Class B 626,679 343,101 Tsim Sha Tsui Properties Ltd 1,052,253 162,000 Wing On Co 187,229 20,000 Wing On International Holdings Ltd 38,481 163,500 Winsor Properties Holdings Ltd * 302,973 1,464,000 World Trade Centre Group Ltd 287,355 637,000 Yizheng Chemical Fibre Co 148,886 ---------------- 17,242,424 ----------------
6 See accompanying notes to the financial statements. GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------- Italy - 5.8% 192,300 Alitalia Linee Aeree Italiane Class A * 69,410 118,000 Alitalia Linee Aeree Italiane Class B Preferred * 30,652 31,400 Ansaldo Transporti SPA * 32,329 355,000 Autostrade Concessioni e Costruzioni SPA Class B Preferred 6.39% 733,107 36,500 Banca Nazionale dell'Agricoltura SPA Preferred 13,693 1,064,200 Banca Nazionale dell'Agricoltura SPA (Non Convertible) 409,308 3,000 Benetton Group SPA 34,420 2,000 Bulgari SPA 34,201 75,000 Caffaro SPA 71,938 33,500 Cartiere Burgo SPA 153,624 200,000 Cementir Cementerie del Tirreno SPA 128,402 172,900 Cia Italiana del Grandi Alberghi Cigahotels SPA * 80,618 42,100 COFIDE SPA (Non Convertible) * 10,961 129,600 COFIDE SPA * 54,447 9,000 Cogefar Impresit Costruzioni Generali SPA * 6,715 167,500 Comau Finanziaria SPA 510,429 5,000 Compart SA * 2,204 37,500 Compart SPA * 18,839 8,800 Danieli and Co SPA 64,282 38,000 Danieli and Co SPA (Non Convertible) 144,805 5,100 Edison SPA 28,035 250 Ericsson SPA 3,210 22,000 Falck Acciaierie and Ferriere Lombarde 97,568 219,000 Fiat SPA Preferred 368,024 307,000 Fiat SPA (Non Convertible) 519,538 700 Fila Holding SPA ADR 42,088 439,500 Finmeccanica SPA (Non Convertible) * 174,240 2,500 Finmeccanica SPA * 1,111 102,000 Fornara SPA (b) * 4,346 230,000 Gemina SPA (Non Convertible) * 127,793 517,800 Gemina * 293,829 75,833 Gilardini SPA 101,634 213,400 Grassetto SPA (b) * 1 29,300 IFI Istituto Finanziario Preferred 2.46% 359,749 96,300 IFIL Finanziaria di Partecipazioni SPA 287,760 108,400 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 208,462 100,400 Industriali Riunite SPA (Non Convertible) * 41,111 170,200 Industriali Riunite SPA * 113,198 800 Industrie Natuzzi SPA ADR 16,500 33,500 Italcementi Fabbriche Riunite Cemento SPA 181,871 53,000 Italcementi Fabbriche Riunite Cemento SPA (Non Convertible) 128,893 117,400 Italgas SPA 418,541 400 Italmobiliare SPA 6,296 4,400 Luxottica Group Sponsored ADR 256,300 4,000 Marzotto and Figli SPA 30,769 35,300 Mondadori Editore 230,808 165,000 Montedison SPA (Non Convertible) * 111,302 190,000 Montedison SPA * 137,160
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 28, 1997
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------- Italy - continued 139,433 Montefibre SPA 85,722 60,000 Montefibre SPA (Non Convertible) 33,053 38,000 Olivetti and Co SPA Preferred * 34,852 166,000 Olivetti and Co SPA (Non Convertible) * 66,498 463,500 Olivetti and Co SPA * 170,041 319,560 Parmalat Finanziaria SPA 439,631 9,000 Permafin Finanziaria * 2,663 74,750 Pirelli and Co 104,827 77,000 Pirelli and Co (Non Convertible) 94,541 110,000 Pirelli SPA 217,722 31,000 Pirelli SPA (Non Convertible) 47,876 16,000 Recordati Industria Chimica e Farmaceutica SPA 120,521 75,500 Recordati Industria Chimica e Farmaceutica SPA (Non Convertible) 308,254 30,000 Rinascente per l'Esercizio di Grandi Magazzini SPA 150,355 220,000 Rinascente per l'Esercizio di Grandi Magazzini SPA Preferred 5.59% 436,095 140,000 Rinascente per l'Esercizio di Grandi Magazzini SPA (Non Convertible) 340,888 19,500 Rinascente Warrants 12/31/99 * 9,519 167,000 SAFFA SPA * 401,195 3,200 SAFILO SPA 53,207 7,500 Saipem SPA 34,238 13,000 Sasib SPA 38,462 22,400 Sasib SPA (Non Convertible) 43,872 72,500 Seat SPA di Risp * 16,774 44,000 Sirti SPA 272,592 355,200 SMI (Societa Metallurgica Italy) * 158,264 115,000 Snia BPD SPA 114,728 605,000 Snia BPD SPA (Non Convertible) 451,065 42,000 Sorin Biomedica SPA 149,609 39,000 Stefanel SPA * 34,962 72,500 STET di Risp (Non Convertible) 253,536 45,000 Telecom Italia Mobile SPA (Non Convertible) 68,831 358,800 Telecom Italia SPA di Risp (Non Convertible) 721,846 590,274 Unione Cementi Marchino Emiliane e di Augusta-Casale (Non Convertible) 1,550,779 1,000 Unione Cementi Marchino Emiliane e di Augusta-Casale 6,030 ---------------- 13,927,569 ---------------- Japan - 16.1% 3,000 Aida Engineering Ltd 19,587 6,000 Aisin Seiki Co Ltd 84,017 7,000 Ajinomoto Co Inc 63,220 20,000 Alps Electric Co Ltd 212,114 20,000 Amada Co Ltd 145,994 2,000 Amano Corp 20,051 3,000 Anritsu Corp 34,303 72,000 Aoki Corp * 103,803 2,000 Aoki International 36,457 5,000 Aoyama Trading 125,528 5,700 Arabian Oil Co Ltd 181,829 31,000 Asahi Breweries Ltd 300,522
8 See accompanying notes to the financial statements. GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------- Japan - continued 6,000 Asahi Denka Kogyo 39,175 6,000 Asahi Optical Co 25,106 1,000 Asatsu Inc 26,763 8,000 Asics Corp * 16,107 11,000 Atsugi Nylon Industrial 36,639 4,000 Bandai Co 82,525 3,000 Bank of Kyoto Ltd 13,050 19,000 Bank of Yokohama Ltd 90,993 6,000 Banyu Pharmaceutical Co Ltd 87,497 2,000 Best Denki Co Ltd 21,377 6,000 Brother Industries Ltd 25,354 11,000 Canon Sales Co Inc 213,274 13,000 Casio Computer Co 100,174 14,000 Chiba Bank Ltd 82,824 9,000 Chiyoda Corp * 47,726 2,000 Chudenko Corp 57,171 23,000 Chugai Pharmaceutical Co Ltd 181,614 3,000 Chugoku Bank Ltd 39,771 23,000 Citizen Watch Co 163,891 68,000 Cosmo Oil Co Ltd 264,811 6,400 CSK Corp 152,192 46,000 Daicel Chemical Industries Ltd 198,194 8,000 Daido Steel Co Ltd 24,261 17,000 Daiichi Seiyaku Co Ltd 277,488 7,000 Daikin Industries Ltd 54,868 33,000 Dainippon Ink & Chemicals Inc 104,176 5,000 Dainippon Pharmaceutical Co Ltd 35,794 4,000 Dainippon Screen Manufacturing Co Ltd 32,281 3,000 Daio Paper Corp 25,354 3,200 Daito Trust Construction Co Ltd 31,287 23,000 Daiwa Bank Ltd 92,427 8,000 Denki Kagaku Kogyo 17,831 1,100 Denny's Japan Co Ltd 28,254 2,000 Descente Ltd 9,744 8,000 Eisai Co Ltd 149,805 4,000 Ezaki Glico Co Ltd 33,143 4,000 Fuji Electric Co 16,505 37,000 Fuji Heavy Industries Ltd 176,278 8,000 Fujikara Ltd 62,706 30,000 Fujisawa Pharmaceutical Co Ltd 260,999 34,000 Fujita Corp 60,568 7,000 Fujita Kanko Inc 77,140 3,000 Fujitec Co 27,591 60,000 Fujiya Co Ltd * 198,857 1,000 Fukuoka City Bank Ltd 4,980 178 Fukuoka City Bank Ltd Rights 3/17/97 282 24,000 Fukuyama Transporting Co Ltd 166,443 11,000 Furukawa Co Ltd 36,457
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 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------- Japan - continued 41,000 Furukawa Electric Co Ltd 190,579 95,000 Gakken Co Ltd 428,992 40,000 General Sekiyu (KK) 241,942 39,000 Godo Shusei Co Ltd 128,610 30,000 Green Cross Corp 124,285 7,000 Gunze Ltd 31,958 64,000 Hankyu Corp 307,035 5,000 Hankyu Department Stores Inc 44,743 26,000 Hanwa Co Ltd * 70,445 37,000 Haseko Corp * 71,738 19,000 Hazama-Gumi Ltd 42,506 1,000 Heiwa Corp 13,837 4,000 Higo Bank Ltd 22,537 8,000 Hiroshima Bank Ltd 32,414 8,000 Hitachi Cable Ltd 54,089 50,600 Hitachi Ltd 436,026 22,000 Hitachi Maxell Ltd 441,130 10,000 Hitachi Metals Ltd 69,600 7,000 Hokuetsu Paper Mills 34,800 8,000 Hokuriku Bank Ltd 27,508 6,000 Honen Corp 22,869 3,000 Hosiden Corp * 20,656 3,000 House Foods Corp 41,760 3,000 Hoya Corp 127,765 25,000 Hyogo Bank Ltd (b) * 2 8,000 INAX Corp 52,697 46,000 Intec Inc 545,033 7,000 Isetan Co Ltd 76,560 11,000 Ishihara Sangyo Kaisha * 25,429 13,000 Itoham Foods Inc 67,860 7,000 Izumiya Co Ltd 92,220 25,000 Japan Airport Terminal Co Ltd 254,785 119,000 Japan Energy Co Ltd 280,023 3,000 Japan Radio Co 28,834 119,000 Japan Synthetic Rubber Co Ltd 844,014 3,000 Japan Wool Textile 18,717 11,000 JGC Corp 62,797 35,000 Joshin Denki Co Ltd 316,099 2,000 Kaken Pharmaceutical Co Ltd 10,324 23,000 Kamigumi Co Ltd 121,203 3,000 Kandenko Co 25,354 7,000 Kaneka Corp 35,148 4,000 Kansai Paint Co Ltd 16,538 7,000 Kao Corp 76,560 3,000 Katokichi Co Ltd 48,223 38,000 Keihin Electric Express Railway Co Ltd 164,040 49,000 Keio Teito Electric Railway Co Ltd 223,299 20,000 Keisei Electric Railway Co Ltd 116,165
10 See accompanying notes to the financial statements. GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------- Japan - continued 5,000 Kenwood Corp 21,336 7,000 Kikkoman Corp 37,758 9,000 Kinden Corp 117,077 2,000 Kissei Pharmaceutical Co Ltd 39,937 16,000 Koito Manufacturing Co Ltd 108,045 59,000 Kokusai Kogyo Co Ltd 488,856 5,000 Kokuyo Co Ltd 106,885 34,000 Komatsu Ltd 253,542 4,000 Komori Corp 83,520 1,000 Konami Co Ltd 28,668 23,000 Konica Corp 138,354 58,000 Koyo Seiko Co Ltd 431,071 44,000 Kumagai Gumi Co Ltd 69,268 123,000 Kurabo Industries Ltd 307,780 14,000 Kuraray Co 116,000 268,000 Kureha Chemical Industry Co Ltd 1,034,783 4,000 Kyodo Printing Co Ltd 29,729 15,000 Kyowa Hakko Kogyo Co Ltd 99,553 1,000 Kyudenko Corp 7,623 3,000 Kyushu Matsushita Electric 32,811 28,000 Lion Corp 117,160 1,900 Mabuchi Motor Co 94,614 66,000 Maeda Corp 400,845 2,000 Maeda Road Construction 17,069 61,000 Makino Milling Machine Co Ltd 428,097 9,000 Makita Corp 123,788 50,000 Marubeni Corp 195,542 3,000 Marudai Food Co Ltd 12,926 2,000 Maruichi Steel Tube 31,320 15,000 Matsushita Electric Works Ltd 131,742 29,000 Matsushita Refrigeration Co 166,037 7,000 Matsuzakaya Co Ltd 57,304 52,000 Mazda Motor Corp * 151,661 7,000 Meiji Seika Kaisha Ltd 33,756 9,000 Mercian Corp 51,603 3,000 Misawa Homes 18,295 32,000 Mitsubishi Gas Chemical Co Inc 117,193 200 Mitsubishi Kasei Corp 555 37,000 Mitsubishi Materials Corp 137,344 71,000 Mitsubishi Oil Co Ltd 295,319 10,000 Mitsubishi Paper Mills Ltd 37,120 20,000 Mitsubishi Rayon Co Ltd 72,583 6,000 Mitsubishi Steel Manufacturing * 20,631 25,000 Mitsubishi Trust & Banking Corp 275,499 8,000 Mitsubishi Warehouse & Transportation Co Ltd 92,800 54,000 Mitsuboshi Belting Ltd 221,477 13,000 Mitsui Mining Co Ltd * 34,684 15,000 Mitsui Petrochemical Industries Ltd 68,854
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 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------- Japan - continued 25,000 Mitsui Toatsu Chemicals Inc 67,114 22,000 Mitsui Trust & Banking Co Ltd 135,985 6,000 Mitsui-Soko Co Ltd 33,259 3,000 Mizuno Corp 18,742 5,000 Mori Seiki Co Ltd 67,114 2,000 MOS Food Services 32,148 83,000 Nagasakiya Co Ltd * 236,573 3,000 Nagase & Co 19,712 60,000 Nagoya Railroad Co Ltd 221,725 2,000 Namco Ltd 56,508 36,000 Nankai Electric Railway Co Ltd 175,988 3,000 National House Industrial 36,291 6,000 NCR Japan Ltd 46,483 23,000 NGK Spark Plug Co 236,308 11,000 NHK Spring Co Ltd 39,191 3,000 Nichicon Corp 34,551 155,000 Nichiei Co Ltd 288,963 16,000 Nichii Co Ltd 205,485 17,000 Nihon Cement Co Ltd 80,993 8,000 Nippon Beet Sugar Manufacturing Co Ltd 26,978 121,000 Nippon Chemi-Con Corp 569,459 5,000 Nippon Comsys 55,100 6,000 Nippon Denko Co Ltd 15,411 8,000 Nippon Flour Mills Co Ltd 28,834 3,000 Nippon Hodo Co 24,261 13,000 Nippon Kayaku Co Ltd 74,430 12,000 Nippon Light Metal 42,655 8,000 Nippon Meat Packers Inc 80,205 12,000 Nippon Metal Industry Co Ltd 33,308 174,000 Nippon Oil Co Ltd 733,830 7,000 Nippon Paint Co 22,968 13,000 Nippon Piston Ring Co Ltd 39,208 23,000 Nippon Sheet Glass Co Ltd 73,370 7,000 Nippon Shokubai Corp 44,660 17,000 Nippon Suisan Kaisha Ltd * 45,215 9,000 Nippon Synthetic Chemical 30,201 14,000 Nippon Yakin Kogyo Co Ltd 31,552 15,000 Nishimatsu Construction 111,857 50,000 Nissan Fire & Marine Insurance Co Ltd 199,271 7,000 Nisshin Flour Milling Co Ltd 59,160 7,000 Nisshin Oil Mills Ltd 35,206 28,000 Nisshin Steel Co Ltd 66,816 8,000 Nisshinbo Industries Inc 57,668 66,000 Nissho Iwai Corp 248,819 4,000 Nissin Food Products Co Ltd 76,560 19,000 Nitto Boseki Co Ltd 58,406 11,000 Nitto Denko Corp 146,740 35,000 NSK Ltd 200,679
12 See accompanying notes to the financial statements. GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------- Japan - continued 13,000 NTN Corp 63,767 55,000 Odakyu Electric Railway Co Ltd 282,998 17,000 Okamoto Industries Inc 70,147 17,000 Oki Electric Industry 89,585 8,000 Okumura Corp 42,290 16,000 Olympus Optical Co Ltd 133,897 3,000 Ono Pharmaceutical Co Ltd 96,445 25,000 Onoda Cement Co Ltd 87,828 15,000 Onward Kashiyama Co Ltd 183,942 12,000 Pioneer Electronics Corp 231,668 3,000 Q.P. Corp 22,620 265,000 Renown Inc * 526,970 2,000 Rinnai Corp 36,126 56,000 Royal Co Ltd 946,557 10,000 Ryobi Ltd 33,640 2,000 Ryosan Co 40,103 25,000 Sanden Corp 200,928 10,000 Sankyo Aluminum Industry Co Ltd 33,060 35,000 Sanrio Co Ltd * 220,399 11,000 Sanwa Shutter Corp 79,567 145,000 Sanyo Securities Co Ltd * 325,586 13,000 Sapporo Breweries Ltd 96,189 5,000 Secom Co Ltd 281,713 16,000 Seino Transportation Co Ltd 159,085 11,000 Sekisui Chemical Co Ltd 113,928 6,000 Settsu Corp * 10,191 2,000 Shimachu Co 46,400 4,000 Shimano Inc 68,274 10,000 Shimadzu Corp 49,548 44,000 Shionogi and Co Ltd 273,792 14,000 Shiseido Co Ltd 163,560 13,000 Shokusan Jutaku Sogo Co Ltd * 21,866 134,000 Showa Denko 294,225 8,000 Showa Electric Wire & Cable 26,912 40,000 Showa Shell Sekiyu 298,616 5,000 Skylark Co Ltd 72,086 10,000 Snow Brand Milk Products Co Ltd 48,637 17,000 Stanley Electric Co Ltd 86,486 3,000 Sumitomo Bakelite Co Ltd 19,662 7,000 Sumitomo Coal Mining Co Ltd 23,896 3,000 Sumitomo Forestry Co Ltd 34,303 39,000 Sumitomo Osaka Cement Co Ltd 106,637 22,000 Sumitomo Trust & Banking Co Ltd 179,551 9,000 Sumitomo Warehouse Co Ltd 45,861 6,000 SXL Corp Ltd 37,832 34,000 Taisei Corp 146,491 11,000 Taisho Pharmaceutical Co Ltd 253,376 18,000 Taiyo Yuden Co Ltd 210,291
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 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------------- Japan - continued 7,000 Takara Shuzo Co Ltd 42,224 6,000 Takara Standard Co 44,792 4,000 Tanabe Seiyaku Co Ltd 29,000 45,000 Teikoku Oil Co Ltd 211,782 10,000 Terumo Corp 145,828 16,000 The Japan Steel Works Ltd * 33,673 9,000 Toagosei Chemical Industry Co Ltd 31,767 64,000 Tobu Railway Co Ltd 286,353 18,000 Toda Corp 103,356 7,000 Toei Co Ltd 43,616 800 Toho Co Ltd 104,731 7,000 Toho Gas Co 17,052 13,000 Tokai Carbon Co Ltd 45,994 7,000 Tokuyama Corp 35,206 5,000 Tokyo Broadcasting System Inc 72,500 9,000 Tokyo Dome Corp 123,788 90,000 Tokyo Electric Co Ltd * 328,113 17,000 Tokyo Ink Manufacturing Co Ltd 64,372 43,000 Tokyo Rope Manufacturing Co Ltd 135,388 8,000 Tokyo Sowa Bank Ltd 28,702 8,000 Tokyo Steel Manufacturing Co 88,160 5,000 Tokyo Style Co Ltd 57,171 13,000 Tokyotokeiba Co Ltd 35,546 113,000 Tokyu Construction Co Ltd 249,051 84,000 Tokyu Corp 393,239 16,000 Tokyu Department Store Co Ltd 53,691 35,000 Toppan Printing Co Ltd 403,099 28,000 Toshiba Tungaloy Co Ltd 125,280 4,000 Tostem Corp 92,800 7,000 Toto Ltd 71,340 19,000 Toyo Engineering Corp 83,437 1,000 Toyo Exterior Co Ltd 13,671 5,000 Toyo Kanetsu (KK) 14,624 6,000 Toyo Suisan Kaisha 55,183 10,000 Toyo Trust & Banking Co Ltd 71,423 3,000 Tsubakimoto Chain 15,635 3,000 Tsugami Corp 7,159 4,000 Tsumura and Co 24,857 1,000 Unicharm Corp 25,686 4,000 Uniden Corp 43,086 4,000 UNY Co Ltd 70,594 193,000 Victor Co of Japan Ltd 1,839,009 10,000 Wacoal Corp 101,085 4,000 Yakult Honsha Co Ltd 40,434 3,000 Yamaguchi Bank Ltd 36,788 9,000 Yamaha Corp 171,514 10,000 Yamanouchi Pharmaceutical Co Ltd 208,799 5,000 Yamatake Honeywell 72,086
14 See accompanying notes to the financial statements. GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------------- Japan - continued 27,000 Yamato Transport Co Ltd 266,219 6,000 Yamazaki Baking Co Ltd 89,983 19,000 Yasuda Trust and Banking Co Ltd 51,636 8,000 Yodogawa Steel Works 45,737 3,000 Yokogawa Bridge Corp 25,354 19,000 Yokogawa Electric Corp 145,621 13,000 Yokohama Rubber Co 53,318 4,000 Yoshitomi Pharmaceutical Industries Ltd 27,243 --------------- 38,068,620 --------------- Malaysia - 2.2% 18,000 Aluminum Co Malaysia 28,852 87,000 Amalgamated Steel Mills Berhad 77,084 42,000 Amcol Holdings Ltd (c) 39,762 28,000 Aokam Perdana Berhad * 60,330 8,000 Ayer Hitam Tin Dredging * 18,204 116,000 Berjaya Group 161,643 69,000 Berjaya Industrial Berhad 110,600 67,000 Berjaya Leisure Berhad 187,535 6,000 Boustead Holdings Berhad 15,820 14,000 Carlsberg Brew Malaysia 120,660 18,000 Cement Industries of Malaysia Berhad 54,732 23,000 DMIB Berhad 27,418 32,000 Ekran Berhad 114,700 37,000 Esso Malaysia Berhad 102,074 20,000 Golden Plus Holdings 51,551 41,000 Guinness Anchor Berhad 105,679 15,000 Hong Leong Industries Berhad 51,349 4,000 Hume Industries Berhad 25,292 42,000 IJM Corp Berhad Class A 112,485 31,000 Innovest Berhad 117,982 67,000 IOI Corporation Berhad 120,886 4,000 Jaya Tiasa Holdings Berhad 21,909 42,000 Johan Holdings Berhad 45,332 57,000 Kedah Cement Berhad 110,648 16,000 Kelanamas Industries 33,830 50,000 Kemayan Corporation Berhad 75,312 16,000 Kian Joo Can Factory 75,393 47,000 Kulim Berhad 114,039 45,000 Land & General Berhad 91,522 57,000 Landmark Berhad 102,384 35,000 Leader Universal Holdings 74,708 45,000 Malayan Cement Berhad 117,801 114,000 Malayan United Industries Berhad 104,221 18,000 Malayawata Steel 35,522 76,000 Malaysian Helicopter Berhad 107,741 38,000 Malaysian Mosaics 66,114 19,000 Malaysian Oxygen Berhad 102,537 29,000 Malaysian Pacific Industries 120,298
See accompanying notes to the financial statements. 15 GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------------- Malaysia - continued 29,333 Malaysian Plantations Rights 4/9/97 * 12,759 44,000 Malaysian Plantations 103,665 4,000 Matsushita Electric 39,146 157,000 MBF Holdings Berhad 104,329 104,000 Mulpha International 113,089 23,000 Multi Purpose Holdings 54,652 24,000 New Straits Times 152,718 22,000 Oriental Holdings Berhad 198,470 3,000 OYL Industries Berhad 29,239 101,000 Pan Malaysia Cement 120,403 24,000 Perlis Plantations 74,426 92,000 Pernas International Hotel & Property 113,379 45,000 Petronas Dagangan Berhad 120,520 28,000 Pilecon Engineering Berhad 50,745 35,000 PJ Development Holdings 40,455 73,000 Promet Berhad * 82,614 36,000 RJ Reynolds Berhad 98,590 24,000 Sarawak Enterprises Corp 45,816 33,000 Shell Refinery Co 106,323 36,000 Sime Darby 41,606 23,000 Sistem Television Malaysia 47,241 24,000 Sungei Way Holdings 69,593 70,000 Tan Chong Motor Holdings Berhad 142,368 64,000 Time Engineering Berhad 144,342 16,000 Tractors Malaysia Holdings Berhad 33,508 28,000 UMW Holdings Berhad 147,725 19,000 Uniphone Telecommunications 26,476 32,000 Westmont Industries Berhad 65,083 --------------- 5,483,229 --------------- New Zealand - 0.3% 25,000 Air New Zealand Ltd Class B 65,202 4,500 Ceramco Corp Ltd 3,767 658,000 DB Group Ltd 455,204 15,510 Fernz Corp Ltd 50,967 42,500 Fletcher Challenge Ltd 60,567 14,500 Independent Newspapers Ltd 68,512 25,300 Lion Nathan Ltd 62,309 2,500 Steel and Tube Holdings Ltd 14,614 --------------- 781,142 --------------- Norway - 3.4% 11,100 Aker AS Class A 283,323 4,000 Aker AS Class B (Non Voting) 96,756 13,700 Bergesen D Y AS Class A 284,629 8,000 Bergesen D Y AS Class B 167,394 123,700 Den Norske Bank AS Class A 550,708 5,800 Dyno Industrier AS 137,714 30,233 Hafslund ASA A Shares 222,084 11,675 Hafslund ASA B Shares 77,099
16 See accompanying notes to the financial statements. GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ------------------------------------------------------------------------------------------------------- Norway - continued 1,200 Kvaerner Industrier AS Class B (Non Voting) 53,424 11,900 Leif Hoegh and Co AS 229,573 64,600 Norsk Hydro AS 3,235,464 12,430 Norske Skogindustrier AS Class A 381,832 2,780 Norske Skogindustrier AS Class B 80,034 30,233 Nycomed ASA A Shares 471,087 11,675 Nycomed ASA B Shares 173,256 6,050 Orkla-Borregaard AS Class A 482,125 3,100 Orkla-Borregaard AS Class B (Non Voting) 228,868 32,126 SAS Norge ASA Class B 319,420 35,300 Unitor AS 455,747 18,571 Vard AS Class A * 38,583 --------------- 7,969,120 --------------- Singapore - 4.2% 2,391,000 Chuan Hup Holdings Ltd 1,844,390 25,200 Fraser and Neave Ltd 226,199 494,000 Hai Sun Hup Group Ltd 367,209 16,500 Haw Paw Brothers International Ltd 38,415 1,650 Haw Paw Brothers International Ltd Warrants 7/18/2001 * 1,597 145,000 Hotel Properties Ltd 256,241 122,000 Inchcape Berhad 426,059 146,483 Jardine Matheson Holdings Ltd 886,222 805,437 Jardine Strategic Holdings Ltd 2,641,833 24,000 Natsteel Ltd 58,906 170,000 Neptune Orient Lines Ltd 146,634 210,000 Parkway Holdings Ltd 883,590 97,000 Prima Ltd 337,391 223,000 Robinson and Co Ltd 914,832 34,000 Straits Trading Co Ltd 83,927 245,000 Times Publishing Ltd 546,353 46,000 Wearne Brothers Ltd 125,806 --------------- 9,785,604 --------------- Spain - 3.6% 12,155 Acerinox SA 1,689,914 36,403 Asturiana del Zinc SA * 472,338 9,300 Azucarera de Espana SA 438,563 27,600 Banco Zaragozano SA 558,354 1,125 Bodegas Y Bebidas SA 30,882 15,650 Cristaleria Espanola SA 1,300,255 22,000 Empresa Nacional de Celulosa SA 300,802 40,400 Ercros SA * 26,210 138,100 Espanola de Tubos por Extrusion SA 265,892 3,500 Fabricacion de Automoviles Renault de Espana SA 67,143 3,783 Grupo Anaya SA 79,170 27,400 Grupo Duro Felguera SA * 278,110 1,010 Koipe SA 50,588 275,820 Sarrio SA 1,002,457 55,799 Tableros Defibras Class B 539,111 167,515 Uralita SA 1,314,645 --------------- 8,414,434 ---------------
See accompanying notes to the financial statements. 17 GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------- Sweden - 5.9% 4,057 Assi Doman 105,238 8,400 Avesta Sheffield AB 85,142 37,400 Bilspedition AB Class B * 139,163 40,700 Celsius Industrier AB Class B 784,352 1,000 Custos AB Series Class B 23,139 11,742 Diligentia AB * 155,817 3,800 Electrolux AB Class B 237,687 40,700 Enator AB * 1,036,756 1,600 Esselte AB Class A 38,730 1,600 Esselte AB Class B 38,837 21,400 Euroc Industri AB Class A 796,282 593 Incentive AB Class A 41,283 897 Industrivarden AB Class A 45,101 952 Industrivarden AB Class C (Bearer) 45,708 2,100 Kinnevik Investment Class B 59,515 57,860 Marieberg Tidnings AB Class A 1,605,057 21,000 Mo Och Domsjo AB Class B 666,569 1,200 Perstorp AB Class B 21,605 2,200 PLM AB 38,877 117,420 Skandinaviska Enskilda Banken Class A 1,237,137 12,600 SKF AB Class B 300,796 6,200 Ssab Swedish Steel Class A 105,427 2,000 Ssab Swedish Steel Class B 34,009 295,400 Stena Line AB Class B 1,402,521 14,950 Stora Kopparberg Bergslags Class A 204,368 7,150 Stora Kopparberg Bergslags Class B 96,788 3,353 Svedala Industries 65,735 5,600 Svenska Cellulosa Class B 124,352 40,600 Svenska Handelsbanken Class B 1,088,356 4,400 Svenska Kullagerfabriken AB 103,866 64,300 Sydkraft AB Class A 1,457,836 55,600 Sydkraft AB Class C 1,082,621 31,900 Trelleborg AB Class B 499,893 2,650 Volvo AB Class A 65,913 ------------------ 13,834,476 ------------------ Switzerland - 5.5% 900 Adia SA (Bearer) 291,661 500 Ascom Holding AG (Registered) 100,678 2,840 Bobst SA (Registered) 1,771,390 100 Danzas Holding AG (Registered) 107,119 350 Elektrowatt AG (Bearer) 126,000 500 Hero Lenzburg (Registered) 55,678 1,050 Hilti AG, Schaan (Participating Certificate) 662,034 550 Holderbank Financiere Glarus AG (Bearer) 409,424 2,400 Holderbank Financiere Glarus AG (Registered) 359,593 1,160 Kuoni Reisen Holdings AG (Registered) 3,051,390 830 Magazine zum Globus (Participating Certificate) 357,885 300 Magazine zum Globus (Registered) 146,441
18 See accompanying notes to the financial statements. GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------- Switzerland - continued 586 Novartis AG (Bearer) 670,622 586 Novartis Rights 3/12/97 * 37,087 4,260 Saurer Group Holdings (Registered) 2,021,695 190 Schindler Holding AG (Participating Certificate) 212,542 270 Schindler Holding AG (Registered) 287,390 1,216 Sika Finanz AG (Bearer) 301,733 3,300 SMH AG (Registered) 434,593 250 Societe Generale de Surveillance Holdings Ltd (Bearer) 567,797 750 Societe Generale de Surveillance Holdings Ltd (Registered) 312,712 175 Sulzer Gebrueder AG (Registered) 109,153 950 Swiss Bank Corp (Registered) 180,339 2,150 Swissair AG (Participating Certificate) * 348,373 90 Union Bank of Switzerland (Registered) 16,414 ------------------ 12,939,743 ------------------ United Kingdom - 24.4% 119,600 Allied Colloids 250,739 96,926 Amstrad Plc 302,037 63,280 Argos Plc 708,235 1,187,000 ASDA Group 2,168,981 66,900 Ashley (Laura) Holdings 171,907 5,400 Associated British Foods 42,817 80,900 Astec (BSR) 190,063 43,990 Barratt Development 199,161 22,060 Bass 307,722 131,592 BAT Industries 1,152,898 63,500 Beazer Holmes Plc 207,201 121,863 Berisford International 272,383 165,000 Blue Circle Industries 1,072,752 28,620 Boots Co 317,049 276,232 British Aerospace 5,747,201 102,135 Bunzl Co 350,763 595,125 Burton Group 1,519,531 26,375 Carlton Communications 224,621 27,760 Charter Plc (Registered) 334,243 55,848 Cobham Group Plc 534,395 72,500 Compass Group 870,568 89,502 Costain Group (c) 65,710 41,081 Dawson International 46,246 140,902 Dixons Group 1,229,867 136,959 English China Clays Plc 478,180 6,200 First Leisure Plc 37,932 36,683 Glaxo Wellcome Plc 621,824 77,177 Grand Metropolitan 572,910 96,020 Greenalls Group Plc 874,144 35,302 Greycoat Plc 92,152 40,448 Hammerson 289,040 109,620 Hazlewood Foods 212,826 327,176 Hillsdown Holdings 1,019,534
See accompanying notes to the financial statements 19 GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------- United Kingdom - continued 11,683 Hyder Plc 158,205 12,618 Hyder Plc Cumulative Redem Preferred Shares 22,182 207,644 Inchcape 901,131 1,575,267 Ladbroke Group 5,911,111 39,334 Laing (John) 194,445 9,309 Laing (John) A (Non Voting) 46,019 1,195,200 Lasmo 4,699,425 88,060 Lex Service 501,408 210,687 London International 574,039 965,481 Lonrho 2,268,262 90,660 Marks & Spencer 735,122 52,634 Marley 106,482 23,500 Mcalpine Alfred 59,811 42,448 Meyer International 278,401 175,023 National Grid Holdings Plc 591,089 200,497 Norcros Plc 300,942 114,085 Northern Foods Plc 396,456 44,480 Ocean Group 340,712 127,000 Racal Electronics 600,881 24,400 Rank Group Plc * 166,002 92,634 Reckitt & Colman 1,204,525 221,800 Rexam Plc 1,176,067 666,902 Rolls-Royce 2,524,277 61,150 Safeway Plc 361,154 59,526 Sainsbury (J) 300,091 5,074 Scottish & Newcastle Plc 56,044 85,597 Securicor Plc 437,109 64,900 Siebe Plc 1,024,961 412,040 Signet Group Plc * 215,118 110,825 Simon Engineering 75,941 18,316 Southwest Water 204,994 18,542 Storehouse Plc 82,888 166,106 T & N 441,733 800,564 Tarmac 1,319,181 672,580 Taylor Woodrow Plc 2,095,870 251,500 Tomkins Plc 1,169,418 117,600 Transport Development Group 393,322 27,855 Unilever 716,447 153,263 United Biscuits 600,117 900 Vendome Luxury Group Plc Units 7,724 84,800 Waste Management International * 326,509 12,040 Whitbread Plc Class A 154,396 128,180 Wilson (Connolly) Holdings 328,327 352,235 Wimpey (George) 810,287 5,368 Wolseley 41,250 ------------------ 57,405,507 ------------------ TOTAL STOCK AND EQUIVALENTS (Cost $201,272,965) 218,887,211 ------------------
See accompanying notes to the financial statements 20 GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Par Value($)/ Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS - 14.6% Cash Equivalents - 13.4% $12,400,000 First National Bank of Chicago Time Deposit, 5.44% due 3/3/97 12,400,000 19,211,824 The Boston Global Investment Trust (d) 19,211,824 ------------------ 31,611,824 ------------------ U.S. Government - 1.2% $ 3,000,000 U.S. Treasury Bill, 5.56% due 1/8/98 (a) 2,862,901 ------------------ TOTAL SHORT-TERM INVESTMENTS (Cost $34,474,499) 34,474,725 ------------------ TOTAL INVESTMENTS - 107.5% (Cost $235,747,464) * * 253,361,936 Other Assets and Liabilities (net) - (7.5%) (17,709,132) ------------------ TOTAL NET ASSETS - 100.0% 235,652,804 ==================
Notes to the Schedule of Investments: ADR American Depositary Receipt (a) This security is held as collateral for open futures contracts (Note 5). (b) Bankrupt security. (c) Valued by management (Note 1). (d) Represents investment of security lending collateral (Note 1). * Non-income producing security. A dividend has not been declared for the year ended February 28, 1997. ** The aggregate identified cost for federal income tax purposes is $235,982,118, resulting in gross unrealized appreciation and depreciation of $42,755,023 and $25,375,205, respectively, and net unrealized appreciation of $17,379,818. See accompanying notes to the financial statements. 21 GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997 - -------------------------------------------------------------------------------- At February 28, 1997, industry sector diversification of the Fund's equity investments was as follows:
Industry Sector (Unaudited) Services 10.0% Construction 8.7 Conglomerates 8.7 Machinery 8.2 Consumer Goods 6.7 Oil and Gas 6.4 Retail Trade 6.2 Aerospace 4.6 Metals and Mining 3.8 Real Estate 3.7 Transportation 3.3 Paper and Allied Products 3.1 Health Care 2.9 Communications 2.8 Banking 2.8 Utilities 2.5 Chemicals 2.5 Electronic Equipment 2.1 Food and Beverage 2.0 Automotive 1.4 Textiles 1.2 Telecommunications 0.7 Financial Services 0.5 Computers 0.4 Insurance 0.2 Miscellaneous 4.6 ----------- 100.0% ===========
22 See accompanying notes to the financial statements. GMO International Small Companies Fund (A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1997 - ----------------------------------------------------------------------------------------------- Assets: Investments, at value (cost $235,747,464)(Note 1) $ 253,361,936 Foreign currency, at value (cost $1,358,260)(Note 1) 1,334,881 Cash 71,971 Receivable for Fund shares sold 350,000 Dividends and interest receivable 182,001 Receivable for open forward foreign currency contracts (Note 5) 3,673,097 Foreign withholding taxes receivable 62,379 Receivable for expenses waived or borne by Manager (Note 2) 169,949 -------------- Total assets 259,206,214 -------------- Liabilities: Payable for open forward foreign currency contracts (Note 5) 3,869,428 Payable upon return of securities loaned (Note 1) 19,211,824 Payable for variation margin on open futures contracts (Notes 1 and 6) 90,361 Payable to affiliate for (Note 2): Management fee 225,161 Shareholder service fee 27,013 Accrued expenses 129,623 -------------- Total liabilities 23,553,410 -------------- Net assets $ 235,652,804 ============== Net assets consist of: Paid-in capital $ 219,016,578 Distributions in excess of net investment income (655,418) Accumulated net realized loss (2,135,553) Net unrealized appreciation 19,427,197 -------------- $ 235,652,804 ============== Net assets attributable to Class III Shares $ 235,652,804 ============== Shares outstanding - Class III 17,508,892 ============== Net asset value per share - Class III $ 13.46 ==============
See accompanying notes to the financial statements. 23 GMO International Small Companies Fund (A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1997 - --------------------------------------------------------------------------------------- Investment income: Dividends (net of foreign tax expense of $623,394) $ 4,644,071 Interest (including securities lending income of $51,390) 1,164,591 ------------- Total income 5,808,662 ------------- Expenses: Management fee (Note 2) 2,889,159 Custodian fees 301,405 Audit fees 66,342 Transfer agent fees 29,076 Stamp duties and transfer taxes 20,502 Legal fees 11,731 Registration fees 5,006 Trustees fee (Note 2) 1,142 Miscellaneous 3,448 Fees waived or borne by Manager (Note 2) (1,833,495) ------------- 1,494,316 Shareholder service fee - Class III (Note 2) 259,782 ------------- Net expenses 1,754,098 ------------- Net investment income 4,054,564 ------------- Realized and unrealized gain (loss): Net realized gain (loss) on: Investments (2,513,028) Closed futures contracts 167,229 Closed swap contracts 216,355 Foreign currency, forward contracts and foreign currency related transactions (4,599,838) ------------- Net realized loss (6,729,282) ------------- Change in net unrealized appreciation (depreciation) on: Investments 13,008,849 Open futures contracts 1,724,730 Foreign currency, forward contracts and foreign currency related transactions 922,147 ------------- Net unrealized gain 15,655,726 ------------- Net realized and unrealized gain 8,926,444 ------------- Net increase in net assets resulting from operations $ 12,981,008 =============
24 See accompanying notes to the financial statements. GMO International Small Companies Fund (A Series of GMO Trust) Statement of Changes in Net Assets - --------------------------------------------------------------------------------
Year Ended February 28, 1997 February 29, 1996 ------------------- ------------------- Increase (decrease) in net assets: Operations: Net investment income $ 4,054,564 $ 3,624,469 Net realized gain (loss) (6,729,282) 4,417,938 Change in net unrealized appreciation (depreciation) 15,655,726 13,287,476 ----------------- ----------------- Net increase in net assets resulting from operations 12,981,008 21,329,883 ----------------- ----------------- Distributions to shareholders from: Net investment income - Class III (1,160,606) (2,798,026) In excess of net investment income - Class III - (319,106) Net realized gains - Class III (3,372,778) (2,401,896) In excess of net realized gains - Class III (30,591) - ----------------- ----------------- (4,563,975) (5,519,028) ----------------- ----------------- Net share transactions - Class III (Note 4) 8,272,041 16,967,675 ----------------- ----------------- Total increase in net assets 16,689,074 32,778,530 Net assets: Beginning of period 218,963,730 186,185,200 ----------------- ----------------- End of period (including distributions in excess of net investment income of $655,418 and accumulated undistributed net investment income of $476,295, respectively) $ 235,652,804 $ 218,963,730 ================= =================
See accompanying notes to the financial statements. 25 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, --------------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- --------- Net asset value, beginning of period $ 12.95 $ 11.95 $ 14.45 $ 8.91 $ 9.62 -------- -------- -------- -------- --------- Income (loss) from investment operations: Net investment income 0.23 0.18 0.18 0.15 0.35 Net realized and unrealized gain (loss) 0.55 1.16 (1.52) 5.59 (0.68) -------- -------- -------- -------- --------- Total from investment operations 0.78 1.34 (1.34) 5.74 (0.33) -------- -------- -------- -------- --------- Less distributions to shareholders from: Net investment income (0.07) (0.17) (0.20) (0.12) (0.38) In excess of net investment income - (0.02) - - - Net realized gains (0.20) (0.15) (0.96) (0.08) - In excess of net realized gains (0.00) - - - - -------- -------- -------- -------- --------- Total distributions (0.27) (0.34) (1.16) (0.20) (0.38) -------- -------- -------- -------- --------- Net asset value, end of period $ 13.46 $ 12.95 $ 11.95 $ 14.45 $ 8.91 ======== ======== ======== ======== ========= Total Return (a) 5.99% 11.43% (9.66%) 64.67% (3.30%) Ratios/Supplemental Data: Net assets, end of period (000's) $ 235,653 $ 218,964 $ 186,185 $ 132,645 $ 35,802 Net expenses to average daily net assets 0.76% (c) 0.76% (c) 0.76% (c) 0.75% 0.75% Net investment income to average daily net assets 1.75% 1.84% 1.45% 1.50% 4.02% Portfolio turnover rate 13% 13% 58% 38% 20% Average broker commission rate per equity share (b) $ 0.0015 N/A N/A N/A N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.10 $ 0.07 $ 0.08 $ 0.09 $ 0.09
(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) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. The average broker commission rate will vary depending on the markets in which trades are executed. (c) Includes stamp duties and taxes not waived or borne by the Manager, which approximate .01% of average daily net assets. 26 See accompanying notes to the financial statements. GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1997 - -------------------------------------------------------------------------------- 1. Significant accounting policies The 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, 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 maximum total return through investment primarily in equity securities of small capitalization foreign companies traded on a major stock exchange of a foreign country. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. At February 28, 1997, Class III was the only active class of shares of the Fund. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 27 GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 net exchange gains and losses on disposition of foreign currencies, 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 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 and sell is shown under Note 5, and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 28, 1997. 28 GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 specified price 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 purchase of 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 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 5 for all open futures contracts held as of February 28, 1997. 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 equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return based on a notional amount. 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, 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 is 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 28, 1997. 29 GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 28, 1997, the Fund loaned securities having a market value of $17,874,621 collateralized by cash in the amount of $19,211,824, 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 "Code"). The Fund intends to distribute substantially all of its taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to the differing treatments for foreign currency transactions. Gains associated with such in-kind redemptions amounted to $19,339. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments. 30 GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued - --------------------------------------------------------------------------------
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in-Capital -------------------------- ------------------------ ------------------- (4,025,671) 4,244,743 (219,072)
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 in such manner as deemed equitable by the Trustees, 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 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 1.00% of the amount invested. In the case of cash redemptions, the fee is .60% of the amount redeemed. Prior to June 1, 1996, the premium on cash purchases and fee on cash redemptions was 1.25% and .75% of the amount invested or redeemed, respectively. All purchase premiums and redemption fees are paid to and recorded as paid-in capital by the Fund. For the year ended February 28, 1997, the Fund received $144,373 in purchase premiums and $41,255 in redemption fees. There is no premium for reinvested distributions. 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 and the possible imposition of currency exchange blockages 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. 31 GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 2. Fees and other transactions with affiliates GMO earns a management fee paid monthly at the annual rate of 1.25% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .60% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .75%; thus, the net annual expense ratio after the waiver for a Class III shareholder is unchanged. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997, was $1,142. 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 28, 1997, aggregated $43,953,796 and $26,113,398, respectively. 32 GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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:
Class III: Year Ended Year Ended February 28, 1997 February 29, 1996 -------------------------------- --------------------------------- Shares Amount Shares Amount ------------- --------------- ------------- --------------- Shares sold 1,509,544 $ 20,156,083 3,283,845 $ 41,404,225 Shares issued to shareholders in reinvestment of distributions 302,311 4,040,065 348,837 4,310,448 Shares repurchased (1,205,784) (15,924,107) (2,315,294) ( 28,746,998) ------------- --------------- ------------- --------------- Net increase 606,071 $ 8,272,041 1,317,388 $ 16,967,675 ============= =============== ============== ===============
5. Financial instruments A summary of outstanding financial instruments at February 28, l997 is as follows: Forward currency contracts
Net Unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) -------------- ----------------------- -------------------- --------------------- ------------------- Buys 3/07/97 ATS 21,091,044 $ 1,775,480 $ (46,200) 3/07/97 AUD 5,553,581 4,310,162 (28,431) 5/09/97 AUD 467,951 362,690 (1,310) 7/11/97 AUD 1,521,909 1,178,997 690 3/07/97 BEF 259,901,740 7,463,990 (831,620) 5/12/97 BEF 41,159,580 1,185,554 (53,446) 7/11/97 BEF 259,901,740 7,513,804 (33,169) 3/03/97 CHF 680,280 461,207 (16,250)
33 GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward currency contracts - continued
Net Unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) -------------- ----------------------- -------------------- --------------------- ------------------- Buys - continued 3/07/97 CHF 485,520 329,264 (60,900) 3/07/97 DEM 5,165,555 3,060,458 (277,542) 5/09/97 DEM 22,762,636 13,539,895 (574,105) 6/13/97 ESP 1,332,560,658 9,276,283 (161,717) 3/07/97 FRF 60,925,421 10,695,708 (599,983) 5/09/97 FRF 23,502,270 4,141,501 (177,499) 7/11/97 FRF 29,304,328 5,184,787 (2,334) 3/07/97 GBP 4,926,172 8,036,628 (124,223) 3/07/97 HKD 134,784,236 17,404,748 2,424 3/07/97 JPY 1,722,540,763 14,278,372 (423,089) 3/03/97 NOK 13,300,000 1,973,718 (130,712) 3/07/97 NOK 14,841,173 2,202,800 (8,176) 6/13/97 NOK 31,811,836 4,744,869 (162,131) 7/11/97 NOK 13,300,000 1,986,941 (16,976) 3/07/97 NZD 2,614,906 1,808,487 (3,854) 5/09/97 NZD 308,296 212,388 (3,612) 3/07/97 SEK 70,740,712 9,435,465 (38,552) 6/13/97 SEK 44,332,113 5,931,438 (85,562) 3/07/97 SGD 224,651 157,537 (1,677) ------------------- $ (3,859,956) =================== Sales 3/07/97 ATS 21,091,044 $ 1,775,480 $ 158,520 3/07/97 AUD 5,553,581 4,310,162 51,984 7/11/97 AUD 4,031,672 3,126,669 (1,317) 3/07/97 BEF 259,901,740 7,463,990 28,124 3/03/97 CHF 680,280 461,207 79,987 3/07/97 CHF 485,520 329,264 11,981
34 GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward currency contracts - continued
Net Unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) -------------- ----------------------- -------------------- --------------------- ------------------- 3/07/97 DEM 5,165,555 3,060,458 62,655 5/09/97 DEM 22,762,636 13,539,895 345,687 3/07/97 FRF 60,925,421 10,695,708 499,437 7/11/97 FRF 31,621,093 5,597,089 1,942 3/07/97 GBP 4,926,172 8,036,628 146,703 3/07/97 HKD 134,784,236 17,404,748 10,300 7/11/97 HKD 134,784,236 17,397,703 (4,560) 3/07/97 JPY 1,722,540,763 14,278,372 986,628 3/03/97 NOK 13,300,000 1,973,718 15,215 3/07/97 NOK 14,841,173 2,202,800 95,200 7/11/97 NOK 14,841,173 2,220,251 5,647 3/07/97 NZD 2,614,906 1,808,487 8,010 5/09/97 NZD 308,296 212,388 (481) 3/07/97 SEK 70,740,712 9,435,465 936,622 5/09/97 SEK 24,605,750 3,290,920 193,080 7/11/97 SEK 70,740,712 9,485,895 30,470 3/07/97 SGD 224,651 157,537 1,791 ------------------- $ 3,663,625 ===================
Currency Abbreviations ATS Austrian Schilling HKD Hong Kong Dollar AUD Australian Dollar JPY Japanese Yen BEF Belgian Franc NOK Norwegian Kroner DEM German Mark NZD New Zealand Dollar ESP Spanish Peseta SEK Swedish Krona CHF Swiss Franc SGD Singapore Dollar FRF French Franc GBP British Pound 35 GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Futures Contracts
Net Unrealized Number of Appreciation Contracts Type Expiration Date Contract Value (Depreciation) ----------------- --------------- ---------------------- --------------- --------------------- Buys 81 CAC- 40 March 1997 $ 7,461,218 $ 1,095,722 5 GXH 7 March 1997 965,822 77,995 93 MIB 30 March 1997 9,544,331 780,411 59 OMX INDEX March 1997 1,615,829 (38,833) 76 TXH7 March 1997 9,067,847 524,873 --------------------- $ 2,440,168 ===================== Sells 111 All-Ords March 1997 $ 5,227,652 $ (184,440) 42 FTSE 100 March 1997 7,340,537 (479,355) 61 Hang Seng March 1997 5,226,433 83,667 40 IBEX March 1997 1,473,596 68,518 16 TOPIX March 1997 69,613,440 112,430 --------------------- $ (399,180) =====================
At February 28, 1997 the Fund had cash and/or securities to cover any margin requirements on open futures contracts. 36 GMO International Small Companies Fund (A Series of GMO Trust) Federal Income Tax Information on Distributions - (Unaudited) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all the Fund's distributions are from investment company taxable income, except that the Fund has designated 55.60% of distributions as net capital gain dividends. At February 28, 1997, the Fund had a capital loss carryforward available to offset future capital gains, if any, of the following amounts: Year of Expiration Amount ------------------ ------ 2005 $975,979 The Fund has also elected to defer to March 1, 1997 post-October losses of $1,679,626. 37 GMO International Small Companies Fund (A Series of GMO Trust) Portfolio Managers - ------------------ Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. Management Discussion and Analysis of Fund Performance - ------------------------------------------------------ The Class III shares of the GMO International Small Companies Fund returned 6.0% for the fiscal year ended February 28, 1997 as compared to 3.2% for EAFE and 7.7% for the GMO EAFE-Lite Index. Consistent with the Fund's investment objective and policies, the Fund was invested substantially in common stocks which ranked within the smallest 50% by market capitalization within each country. With the exception of Japan and Singapore, the majority of the EAFE ex-Japan countries experienced strong performance during the year. The Japanese market declined by -8.8% in local terms, while EAFE ex-Japan rose by 25.6%. These returns were depressed somewhat for U.S. investors as a result of the dollar's rally during the period, 7.6% versus an EAFE-Lite basket of currencies. Country selection (in local terms) detracted from the Fund's relative performance for the year. The Fund's underweighting of strong performing countries such as the Netherlands, France and Germany overshadowed the positive contribution of underweighting Japan and overweighting Finland and Canada. Effect of currency weights The effect of the Fund's currency weights added value to the account's relative performance, primarily from underweighting the yen, Swiss franc and Dutch guilder. The Fund also benefited from an overweight position in the pound sterling, which was the strongest performing currency for the year. The Fund was modestly hedged back to the U.S. dollar during the year, which added value as well. Effect of stock selection Stock selection negatively impacted the Fund's performance for the year. International small capitalization stocks had mixed results, outperforming the average stock by 0.2% within the EAFE ex-Japan countries during the year, while underperforming the average stock in Japan by -1.4%. Small value stocks also underperformed. 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 MSCI EAFE Index As of February 28, 1997 Average Annual Total Return
Since Inception 1 Year 5 Year 10/14/91 Class III 4.3% 10.8% 9.2%
[Line Graph Appears Here]
Date GMO International Small Companies Fund MSCI EAFE Index 10/14/91 9,900 10,000 02/29/92 9,541 9,591 02/28/93 9,205 9,195 02/28/94 15,175 12,798 02/28/95 13,711 12,230 02/29/96 15,278 14,291 02/28/97 16,096 14,754
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. 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 purchase and 60 bp on redemption. Transaction fees are paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Class I shares and Class II shares have not commenced operations. Past performance is not indicative of future performance. Information is unaudited. Pelican Fund (A Series of GMO Trust) Annual Report February 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 10, 1997 Pelican Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value - -------------------------------------------------------------------------------------------------------------- COMMON STOCKS - 82.7% Aerospace - 0.3% 1,470 Boeing Co 149,573 12,500 Sundstrand Corp 545,313 ---------------- 694,886 ---------------- Automotive - 1.8% 10,000 Chrysler Corp 338,750 15,000 General Motors Corp 868,125 135,000 Mascotech Industries Inc 2,565,000 ---------------- 3,771,875 ---------------- Banking and Financial Services - 11.0% 45,000 American Express Co 2,941,875 112,500 Block (HR) Inc 3,304,688 40,000 Chase Manhattan Corp 4,005,000 50,000 Citicorp 5,837,500 25,000 First Chicago NBD Corp 1,462,500 7,500 Great Western Financial 329,063 10,000 Nationsbank Corp 598,750 10,000 PNC Bank Corp 423,750 42,500 Travelers Group Inc (The) 2,279,063 5,000 Wells Fargo Co 1,521,250 ---------------- 22,703,439 ---------------- Chemicals - 0.8% 25,000 Albemarle Corp 490,625 10,000 Bayer A G 373,125 25,000 Borden Chemical and Plastics LP 287,500 10,000 Georgia Gulf Corp 270,000 10,000 Millennium Chemicals Inc 191,250 ---------------- 1,612,500 ---------------- Computer and Office Equipment - 0.4% 100,000 Intergraph Corp * 825,000 ---------------- Conglomerate - 0.2% 18,750 Hanson Plc ADR 417,188 ---------------- Construction - 0.1% 12,500 McDermott International Inc 278,125 ---------------- Consumer Goods - 4.4% 25,000 Black & Decker Corp 790,625 10,000 Burlington Industries Inc 128,750 60,000 Eastman Kodak 5,377,500 30,000 Maytag Corp 660,000 100,000 Safety Kleen 1,800,000 15,000 Scotts Company Class A 318,750 ---------------- 9,075,625 ----------------
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 28, 1997
Shares Description Value - -------------------------------------------------------------------------------------------------------------- Electronic Equipment - 0.2% 25,000 International Rectifier Corp * 337,500 5,000 National Semiconductor Corp * 130,625 ---------------- 468,125 ---------------- Environmental Control - 2.6% 50,000 Wheelabrator Technologies Inc 712,500 150,000 WMX Technologies 4,743,735 ---------------- 5,456,235 ---------------- Food and Beverage - 2.4% 15,000 Anheuser-Busch Cos Inc 667,500 12,500 Archer Daniels Midland 231,250 20,000 Coors (Adolph) Co 427,500 15,000 Darden Restaurants Inc 108,750 15,000 IBP Inc 348,750 42,500 Nestle SA ADR 2,313,692 15,000 Riviana Foods Inc 270,000 15,000 Sara Lee Corp 581,250 5,000 Wendys International Inc 103,750 ---------------- 5,052,442 ---------------- Health Care - 1.5% 37,500 Baxter International Inc 1,725,000 50,000 Beverly Enterprises Inc * 718,750 5,000 Haemonetics Corp * 86,250 50,000 Owens and Minor Holdings Co 512,500 5,000 Quest Diagnostics Inc 84,375 ---------------- 3,126,875 ---------------- Insurance - 6.8% 7,500 Aetna Inc 621,563 25,000 Allstate Corp 1,584,375 10,000 Chartwell Re Corp 275,000 7,500 Cigna Corp 1,146,563 10,000 Gallagher (Arthur J) and Co 307,500 7,500 Liberty Corp 308,438 10,000 Magellan Health Services Inc 246,250 175,000 Reliance Group Holdings Inc 1,903,125 50,000 Sedgwick Group ADR 517,995 110,000 TIG Holdings Inc 3,932,500 10,000 Transamerica Corp 876,250 50,000 USF & G Corp 1,125,000 20,000 Washington National Corp 570,000 60,000 Willis Corroon Group Plc ADR 727,500 ---------------- 14,142,059 ---------------- Machinery - 1.5% 35,000 Cincinnati Milacron Inc 752,500 25,000 Coltec Industries Inc 456,250 7,500 Cummins Engine Inc 379,688 12,500 FMC Corp * 859,375 50,000 Giddings and Lewis Inc 690,625 ---------------- 3,138,438 ----------------
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 28, 1997
Shares Description Value - -------------------------------------------------------------------------------------------------------------- Manufacturing - 8.8% 35,000 American Greetings Corp 1,085,000 37,500 Corning Inc 1,410,938 17,500 General Electric Co 1,800,313 50,000 Griffon Corp * 700,000 27,500 International Business Machines Corp 3,953,125 82,500 Owens Corning 3,495,938 35,000 Rockwell International Corp 2,266,250 12,500 Tenneco Inc 492,188 40,000 United Technologies Corp 3,010,000 ---------------- 18,213,752 ---------------- Metals and Mining - 1.9% 5,000 Alcan Aluminum Ltd 179,375 95,000 Allegheny Teledyne Inc 2,422,500 25,000 Amcol International Corp 471,875 5,000 Asarco Inc 156,250 30,000 Echo Bay Mines Ltd 232,500 15,000 Pittston Minerals Group 217,500 15,000 Placer Dome Inc 322,500 1,666 Westaim Corp * 5,485 ---------------- 4,007,985 ---------------- Oil and Gas - 8.7% 7,500 Amerada Hess Corp 400,313 15,000 Cabot Oil & Gas Corp, Class A 238,125 15,000 Coflexip SA ADR * 417,188 5,000 Dresser Industries Inc 151,875 37,500 Enron Oil & Gas Co 759,375 35,000 Enserch Corp 735,000 5,000 Halliburton Co 323,125 50,000 Lasmo Plc ADR 593,750 20,000 Mitchell Energy Class A 420,000 40,000 Mitchell Energy Class B 860,000 5,000 Mobil Corp 613,750 50,000 Noram Energy Corp 750,000 25,000 Occidental Petroleum Corp 637,500 75,000 Panenergy Corp 3,196,875 72,500 Santa Fe Energy Resources Inc * 933,438 2,500 Texaco Inc 247,188 35,000 Union Texas Petroleum Holdings Inc 647,500 45,000 Unocal Corp 1,738,125 115,000 USX - Marathon Group 3,061,875 50,000 Westcoast Energy Inc 906,250 15,000 YPF Sociedad Anonima ADR 401,250 ---------------- 18,032,502 ---------------- Paper and Allied Products - 0.6% 25,000 James River Corp 818,750 10,000 Weyerhaeuser Co 462,500 ---------------- 1,281,250 ----------------
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 28, 1997
Shares Description Value - -------------------------------------------------------------------------------------------------------------- Pharmaceuticals - 1.9% 10,000 Allergan Inc 340,000 10,000 Covance Inc * 190,000 15,000 Glaxo Wellcome Plc ADR 508,125 10,000 Immulogic Pharmaceutical Corp 55,000 17,500 Lilly (Eli) and Co 1,529,063 25,000 Medpartners Inc 550,000 10,000 Smithkline Beecham PLC 742,500 ---------------- 3,914,688 ---------------- Primary Processing - 0.7% 7,500 Du Pont (E I) De Nemours & Co Inc 804,375 25,000 Intermet Corp 378,125 10,000 LTV Corp 125,000 10,000 Northwestern Steel and Wire 42,500 ---------------- 1,350,000 ---------------- Printing and Publishing - 0.6% 5,000 Dun & Bradstreet Corp 122,500 50,000 News Corp Ltd 1,062,500 ---------------- 1,185,000 ---------------- Real Estate - 1.9% 10,000 Evans Withycombe Residential 205,000 65,000 JP Realty Inc 1,673,750 50,000 Summit Properties Inc 1,012,500 37,500 Walden Residential Properties Inc 965,625 ---------------- 3,856,875 ---------------- Refining - 0.4% 10,000 Imperial Oil Ltd 438,750 25,000 Quaker State Corp 365,625 ---------------- 804,375 ---------------- Retail Trade - 2.9% 7,500 American Stores Co 335,625 60,000 Costco Co Inc 1,537,500 30,000 Federated Department Stores 1,042,500 5,000 Sears Roebuck & Co 271,250 25,000 Toys R Us Inc * 650,000 75,000 Wal-Mart Stores Inc 1,978,125 5,000 Williams-Sonoma Inc * 125,938 ---------------- 5,940,938 ---------------- Services - 1.8% 1,666 AC Nielson Corp * 24,574 37,500 Cordiant Plc ADR * 182,813 10,000 Kellwood Co 236,250 12,500 Manpower Inc 471,875 50,000 Morningstar Group Inc * 1,150,000 50,000 Ogden Corp 1,018,750 10,000 Pinkertons Inc 263,750 50,000 Waste Management International Plc 375,000 ---------------- 3,723,012 ----------------
4 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 28, 1997
Shares Description Value - -------------------------------------------------------------------------------------------------------------- Technology - 7.9% 32,500 Avnet Inc 2,031,250 25,000 Bay Networks Inc * 475,000 25,000 Data General Corp * 484,375 70,000 Digital Equipment Corp * 2,292,500 25,000 Information Resources Inc 371,875 15,000 Intel Corp 2,128,125 100,000 Storage Technology Corp * 4,175,000 287,500 Tandem Computers Inc * 3,593,750 12,500 Xerox Corp 781,250 ---------------- 16,333,125 ---------------- Telecommunications - 4.3% 5,000 Airtouch Communications Inc 136,250 10,000 AT&T Corp 398,750 25,000 Cox Communications Inc 503,125 75,000 GTE Corp 3,506,250 2,500 Lucent Technologies Inc 134,688 45,000 MCI Communications Corp 1,608,750 5,200 Pacific Telesis Group 211,900 70,000 Tele-Communications Class A 831,250 15,000 US West Inc 540,000 60,000 US West Media Group 1,102,500 ---------------- 8,973,463 ---------------- Tobacco - 0.7% 10,000 American Brands Inc 526,250 10,000 BAT Industries Plc ADR 176,250 47,500 Imperial Tobacco Group Plc 653,125 ---------------- 1,355,625 ---------------- Transportation - 1.8% 10,000 AMR Corp * 786,250 60,000 Canadian Pacific Ltd 1,485,000 7,500 Delta Air Lines Inc 603,750 5,000 Hunt (JB) Transportation Services Inc 69,375 10,000 Overseas Shipholding Group Inc 173,750 17,500 Ryder System Inc 551,250 ---------------- 3,669,375 ---------------- Utilities - 3.8% 10,000 CMS Energy Corp 327,500 18,750 Energy Group Plc 637,500 115,000 Niagara Mohawk Power Corp * 1,178,750 5,000 Pacific Corp 103,125 75,000 Texas Utilities 3,028,125 25,000 TransCanada Pipeline Ltd 459,375 95,000 Unicom Corp 2,113,750 ---------------- 7,848,125 ---------------- TOTAL COMMON STOCKS (Cost $113,540,452) 171,252,902 ----------------
See accompanying notest to the financial statements. 5 Pelican Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value - ----------------------------------------------------------------------------------------------------------------------- PREFERRED STOCKS - 4.0% Food and Beverage - 0.5% 160,000 RJR Nabisco Holdings Convertible Preferred Series C 9.25% 1,140,000 ---------------- Insurance - 0.4% 15,000 Alexander & Alexander Services Inc Convertible Preferred $3.63 144A 795,000 ---------------- Manufacturing - 1.1% 137,500 Westinghouse Electric Corp Convertible Preferred $1.30 144A 2,148,438 ---------------- Metals and Mining - 0.4% 25,000 Freeport-McMoran Corp Preferred 0.00% 828,125 ---------------- Oil and Gas - 0.2% 22,500 Atlantic Richfield Co Convertible Preferred 9.00% 514,688 ---------------- Paper and Allied Products - 0.4% 28,500 James River Corp Convertible Preferred 9.00% 872,813 ---------------- Primary Processing - 0.0% 500 Armco Inc Convertible Preferred $3.625 20,750 ---------------- Refining - 0.3% 10,000 Ashland Inc Convertible Preferred $3.125 650,000 ---------------- Transportation - 0.7% 16,500 Navistar International Corp Preferred $6.00 957,000 7,500 USAir Group Inc Convertible Preferred Series B $4.38 * 440,625 ---------------- 1,397,625 ---------------- TOTAL PREFERRED STOCKS (Cost $7,342,074) 8,367,439 ---------------- Par Value DEBT OBLIGATIONS - 12.7% Banking and Financial Services - 1.0% $ 194,101 Citicorp, Variable Rate Note, 6.50% due 5/1/04 194,485 1,000,000 General Motors Acceptance Corp, 5.50% due 12/15/01 945,940 1,000,000 Standard Credit Card Master Trust I, Variable Rate Note, 5.84% due 9/15/97 1,001,250 ---------------- 2,141,675 ---------------- Food and Beverage - 0.5% 250,000 Anheuser-Busch Cos Inc, 8.50% due 3/1/17 259,413 750,000 General Foods Corp, 7.00% due 6/15/11 705,158 ---------------- 964,571 ---------------- Paper and Allied Products - 0.3% 500,000 Georgia Pacific Corp, 9.75% due 1/15/18 521,825 ---------------- Real Estate - 0.9% 1,750,000 HMH Properties Inc, 9.50% due 5/15/05 1,841,875 ----------------
6 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 28, 1997
Par Value Description Value - ----------------------------------------------------------------------------------------------------------------------- Retail Trade - 0.5% $ 1,000,000 Kmart Corp, 8.13% due 12/01/06 970,000 ---------------- Technology - 0.5% 1,000,000 VLSI Technology Inc, 8.25% due 10/01/05 957,500 ---------------- Transportation - 1.0% 1,000,000 AMR Corp, 9.00% due 8/1/12 1,115,810 1,100,000 United Air Lines Inc, 9.13% due 1/15/12 1,205,402 ---------------- 2,321,212 ---------------- U.S. Government - 7.9% 7,500,000 U.S. Treasury Note, 4.75% due 8/31/98 7,372,275 1,250,000 U.S. Treasury Note, 7.75% due 2/15/01 1,310,550 3,500,000 U.S. Treasury Bond, 11.13% due 8/15/03 4,345,460 750,000 U.S. Treasury Bond, 10.75% due 8/15/05 949,808 2,500,000 U.S. Treasury Bond, 7.25% due 5/15/16 2,590,225 ---------------- 16,568,318 ---------------- U.S. Government Agency - 0.1% 373,486 Federal Home Loan Mortgage Corp, 7.50% due 1/1/23, 124,300 Series 146, Interest Only Strip ---------------- TOTAL DEBT OBLIGATIONS (Cost $25,279,048) 26,411,276 ---------------- SHORT-TERM INVESTMENT - 0.6% 1,260,000 State Street Bank and Trust Co Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $1,260,420 and an effective yield of 4.00%, collateralized by a U.S. Treasury Note, with a rate of 5.88% due 7/31/97 with an aggregate market value of $1,287,817 (Cost $1,260,000). 1,260,000 ---------------- TOTAL INVESTMENTS - 100.0% (Cost $147,421,574) * * 207,291,617 Other Assets and Liabilities (net) - 0.0% 77,251 ---------------- TOTAL NET ASSETS - 100.0% $ 207,368,868 ================
See accompanying notes to the financial statements. 7 Pelican Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997 - -------------------------------------------------------------------------------- Notes to the Schedule of Investments: ADR - American Depositary Receipt 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 Rate Notes - The rates shown on variable rate notes are the current interest rates at February 28, 1997, which are subject to change based on the terms of the security. * Non-income producing security. ** The aggregate identified cost for federal income tax purposes is $148,775,237, resulting in gross unrealized appreciation and depreciation of $62,437,538 and $3,921,158, respectively, and net unrealized appreciation of $58,516,380. 8 See accompanying notes to the financial statements. Pelican Fund (A Series of GMO Trust) Statement of Assets and Liabilities - February 28, 1997 - --------------------------------------------------------------------------------
Assets: Investments, at value (cost $147,421,574) (Note 1) $ 207,291,617 Cash 965 Dividends and interest receivable 615,424 Receivable for investments sold 149,115 Receivable for Fund shares sold 250 ----------------- Total assets 208,057,371 ----------------- Liabilities: Payable for investments purchased 369,625 Payable for Fund shares repurchased 91,592 Payable to affiliate for management fee (Note 2) 144,888 Accrued expenses and other liabilities 82,398 ----------------- Total liabilities 688,503 ----------------- Net Assets (equivalent to $16.31 per share based on 12,714,161 shares outstanding, unlimited shares authorized) $ 207,368,868 ================= Net Assets consist of: Paid-in capital $ 141,348,438 Accumulated undistributed net investment income 1,473,363 Accumulated undistributed net realized gain 4,677,024 Net unrealized appreciation 59,870,043 ----------------- Net assets $ 207,368,868 =================
See accompanying notes to the financial statements. 9 Pelican Fund (A Series of GMO Trust) Statement of Operations - Year Ended February 28, 1997 - --------------------------------------------------------------------------------
Investment income: Dividends (net of withholding taxes of $73,088) $ 3,665,356 Interest 2,141,973 ----------------- Total income 5,807,329 ----------------- Expenses: Management fee (Note 2) 1,716,394 Custodian and transfer agent fees 179,101 Audit fees 54,749 Registration fees 9,079 Legal fees 8,648 Trustees fee (Note 2) 958 Miscellaneous 4,912 ----------------- Total expenses 1,973,841 Less: expenses waived or borne by Manager (Note 2) (162,010) ----------------- Net expenses 1,811,831 ----------------- Net investment income 3,995,498 ----------------- Realized and unrealized gain (loss): Net realized gain on investments 9,036,632 Change in net unrealized appreciation (depreciation) on investments 19,894,742 ----------------- Net realized and unrealized gain 28,931,374 ----------------- Net increase in net assets resulting from operations $ 32,926,872 =================
10 See accompanying notes to the financial statements. Pelican Fund (A Series of GMO Trust) Statement of Changes in Net Assets - --------------------------------------------------------------------------------
Year Ended February 28, 1997 February 29, 1996 ------------------ ------------------- Increase (decrease) in net assets: Operations: Net investment income $ 3,995,498 $ 3,735,370 Net realized gain 9,036,632 9,082,971 Change in net unrealized appreciation (depreciation) 19,894,742 25,308,348 ----------------- ------------------ Net increase in net assets resulting from operations 32,926,872 38,126,689 ----------------- ------------------ Distributions to shareholders from: Net investment income (3,383,491) (3,369,047) Net realized gains (6,758,143) (6,173,331) ----------------- ------------------ (10,141,634) (9,542,378) ----------------- ------------------ Fund share transactions: (Note 5) Proceeds from sale of shares 22,372,007 37,226,671 Net asset value of shares issued to shareholders in payment of distributions declared 9,313,111 8,801,280 Cost of shares repurchased (24,339,781) (15,293,740) ----------------- ------------------ Net increase in net assets resulting from Fund share transactions 7,345,337 30,734,211 ----------------- ------------------ Total increase in net assets 30,130,575 59,318,522 Net assets: Beginning of period 177,238,293 117,919,771 ----------------- ------------------ End of period (including accumulated undistributed net investment income of $1,473,363 and $646,595, respectively) $ 207,368,868 $ 177,238,293 ================= ==================
See accompanying notes to the financial statements. 11 Pelican Fund (A Series of GMO Trust) Financial Highlights (For a share outstanding throughout each period) - --------------------------------------------------------------------------------
February 28/29 -------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- Net asset value, beginning of period $ 14.52 $ 11.99 $ 12.08 $ 11.37 $ 10.70 ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.33 0.31 0.37 0.29 0.36 Net realized and unrealized gain 2.27 3.04 0.46 1.40 1.06 ---------- ---------- ---------- ---------- ---------- Total from investment operations 2.60 3.35 0.83 1.69 1.42 ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.27) (0.29) (0.37) (0.37) (0.38) From net realized gains (0.54) (0.53) (0.55) (0.61) (0.37) ---------- ---------- ---------- ---------- ---------- Total distributions (0.81) (0.82) (0.92) (0.98) (0.75) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 16.31 $ 14.52 $ 11.99 $ 12.08 $ 11.37 ========== ========== ========== ========== ========== Total Return (a) 18.40% 28.54% 7.38% 15.14% 13.93% Ratios/Supplemental Data: Net assets, end of period (000's) $ 207,369 $ 177,238 $ 117,920 $ 101,165 $ 85,401 Net expenses to average daily net assets 0.95% 1.05% 1.10% 1.10% 1.10% Net investment income to average daily net assets 2.10% 2.42% 2.51% 2.42% 3.40% Portfolio turnover rate 27% 32% 40% 49% 39% Average broker commission rate (b) $ 0.0556 N/A N/A N/A N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ - $ - $ 0.01 $ 0.01
(a) The total returns would have been lower had certain expenses not been waived during the periods shown. (b) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. 12 See accompanying notes to the financial statements. Pelican Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1997 - -------------------------------------------------------------------------------- 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 capital growth primarily through investment in equity securities. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 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. 13 Pelican Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 taxable 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 federal income tax purposes. Therefore, no provision for 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 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. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for amortization of discount on bonds. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Accumulated Net Undistributed Net Realized Paid-in Investment Income Gain/(Loss) Capital ------------------- ----------------- ----------------- $214,761 ($214,761) -
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. 14 Pelican Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Security transactions and related investment income Security transactions are accounted for on trade 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. 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 in such a manner as deemed equitable by the Trustees, 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 .90% of average daily net assets. GMO has agreed to waive a portion of its fee and bear other expenses until further notice to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions and transfer taxes) exceed .95% of average daily net assets. Prior to March 1, 1996, the expense limitation was 1.10% 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 28, 1997, was $958. 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 28, 1997, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Proceeds ------------ ------------ U.S. Government securities $ 6,995,188 $ 626,313 Investments (non-U.S. Government securities) 53,479,746 48,638,997
4. Principal shareholder At February 28, 1997, 37% of the outstanding shares of the Fund were held by one shareholder. 15 Pelican Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 28, 1997 February 29, 1996 ------------------- ------------------- Shares sold 1,487,108 2,841,802 Shares issued to shareholders in reinvestment of distributions 632,940 647,025 Shares repurchased (1,610,011) (1,115,726) ------------ ------------ Net increase 510,037 2,373,101 Fund shares: Beginning of period 12,204,124 9,831,023 ------------ ------------ End of period 12,714,161 12,204,124 ============ ============
16 Pelican Fund (A Series of GMO Trust) Federal Tax Information - (Unaudited) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 55.74% distributions as net capital gain dividends. 17 GMO Pelican Fund (A Series of the GMO Trust) Portfolio Manager: - ----------------- Mr. Richard Mayo is responsible for the management of the GMO 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 - ------------------------------------------------------ The Investing Environment The last year in general and the last six months in particular have witnessed very favorable conditions for supporting improved stock prices. Inflation has remained at very low levels, helping to keep interest rates near twenty year lows, and most importantly corporate profitability which has been improving steadily from the recession of 1990 has reached levels (see chart) more like the 1960's. - ---------------------------------- ----------------------------------- S&P 500 Operating vs. S&P Industrials' After- Reported Earnings ----------------------- 4-Quarter Trailing EPS Tax Profit Margin ----------------- [LINE GRAPH APPEARS HERE] [LINE GRAPH APPEARS HERE] - ---------------------------------- ----------------------------------- This is worth mentioning because the stock market was valued more frequently then at 16-18 times earnings than the 14-16 area we experienced in the last 10-15 years. The chart below shows the valuation differences in the periods of low inflation and good profitability. The important point here is to develop one's expectations of the future stock returns not so much on the level of the market but on the ability of corporations to maintain their very high profit ratios - return on sales or return on assets - relative to the past. Low Inflation is Very Positive for Valuations
- ------------------------------------------------------------------------------- 1960s 1970s 1980s 1990s Latest - ------------------------------------------------------------------------------- Inflation - GDP Deflator (y/y) High 4.7 9.4 9.3 4.3 Average 2.2 6.7 5.0 2.7 1.8 Low 1.2 4.2 2.6 1.8 S&P 500 P/E Ratio High 22.0 18.4 16.3 24.3 Average 17.6 12.1 12.2 20.1 20.8 Low 15.9 7.2 8.0 16.2 Return on Capital in U.S. (in %) High 14.2 14.9 17.3 18.5 Average 12.2 14.0 15.1 17.8 18.4 Low 9.2 12.8 12.6 16.6 - --------------------------------------------------------------------------------
Source: JP Morgan dated March 3, 1997 Today's robust profitability is a result of very significant attitude shifts on the part of today's corporate leaders. They have become exceedingly cost conscious, whether by downsizing, restructuring (consolidating manufacturing plants, administrative offices, etc. ) or selling low return assets, and they have greatly improved returns as shown in the charts above. A lot of this should be thought of as a permanent improvement. Other elements such as the steadily declining wage costs and the lower dollar of the late 1980's and early 1990's have shifted direction and may negatively impact profit margins in the near future. - ---------------------------------- ----------------------------------- Real Average Weekly Earnings Trade-Weighted U.S. Dollar 3 Mo. Avg. Feb $258.7 [LINE GRAPH APPEARS HERE] [LINE GRAPH APPEARS HERE] - ---------------------------------- ----------------------------------- As a consequence we are less optimistic about the future growth in profits and worry that consensus opinions that were bolstered by the strong fourth quarter (year over year up more than 10%) are much too high. At the moment the market seems to be projecting earnings growth rates of 7-8%, a rate of growth that would be very unusual considering the six year improvement that has already occurred. Also important to understanding the market advance and to forecasting future returns are the money flows. The mutual fund investor has invested huge amounts in equity funds - about $240 billion last year. The inflows get invested immediately and are creating unusual volatility day-to-day or even intraday. - -------------------------------------------------------------------------------- Net New Cash Into Equity Mutual Funds in Millions [LINE GRAPH APPEARS HERE] - -------------------------------------------------------------------------------- We don't know what level of inflows is sustainable, but we know any significant contraction of funds from this source will be a problem for the market. Another important flow of money into stocks has resulted from the greatly improved profitability of corporations. Their cash flow has improved dramatically and their reluctance to significantly increase their investments has taken their free cash flow to record levels. - -------------------------------------------------------------------------------- Cash Flow and Free Cash Flow for the S&P Industrials Are at Record Levels [LINE GRAPH APPEARS HERE] - -------------------------------------------------------------------------------- These flows have been used to repurchase their own stock as corporate executives believe their own company is one of their best investments if their own returns are rising. Furthermore, buying in stock produces "immediate" returns versus waiting for the payoff of a long term project. Reinforcing this is the fact that many executives' compensation is tied directly to stock prices through stock options. Corporations bought about $150 billion of their own stock in 1996 and seem to be running at an equivalent rate this year. These stock investments and the mutual fund inflows have given the market a tremendous boost but they must continue and even accelerate to keep the market advancing. Any slowdown and the long awaited correction may become a reality. Our concern about the sustainability of money flows as well as the possibility of an interruption of rising profit margins has encouraged us to try to reduce risk in the portfolio. We have done this by selling stocks that looked overpriced and letting the percentage invested in stocks decline. Unfortunately in the short term this has had an unfavorable impact on relative performance. This has happened for two main reasons. One, being underinvested in a rising market leaves something on the table, so to speak. But we are simply reacting to the risk-reward equation, and we want to have the reserves to re-employ assuming the market declines or to be able to quickly move into an individual stock that gets oversold due to short term concerns. Investors today have a long term horizon for what is working, yet a short term focus when faced with disappointments. The second point is about size and momentum. Two years ago the largest companies were undervalued. We increased our exposure to that sector by adding stock like Eli Lilly, Johnson & Johnson, GTE, General Electric, and DuPont; in hindsight we did not get enough into the large companies because they become the major investment theme of the last eighteen months. More recently we concluded that the large stock category was overvalued. In the last twelve months the fifty largest (market capitalization) stocks outperformed the remaining 450 in the S&P 500 by more than 20%. This is enormous in historical terms. In addition our analysis suggests investors expect the 15 largest companies to grow at an average of 13% for the next ten years. This is almost twice the growth rate for the average corporation. We are skeptical that this is achievable. Our skepticism has encouraged us to take profits in most of these companies. However money managers today prefer to stick with companies that are meeting expectations and valuation is secondary. This is a problem for a long term, value oriented manager. Our valuation emphasis has encouraged us to shift money to a sector that we define as low expectation stocks. Most investors believe that Eli Lilly will grow earnings 17% for the next 10 years. They must deliver. We prefer situations where there is short term frustration and we can buy a good business or very good assets where improvements will produce very good rewards and disappointments will lead to only minor penalties. A short capsule of four situations I hope will give you an understanding of what we are doing in the portfolio. WMX Technology - This waste hauling company was a growth company in the 1980s. It tried to continue to grow in the 1990s by investing in lower return assets. As a consequence its return on assets declined from a peak of 17% to 5% in 1993. Growth investors liquidated their positions over the past five years in frustration. Finally provoked by investor criticism, management reassessed its businesses and today is making ROA its main priority. This has encouraged management to put up for sale $1.5 billion of assets and use a large part of the proceeds to repurchase stock. In addition a program has been instituted to cut costs which we think will boost profits by 10-15%. Investors remain skeptical in the short term due to some management turmoil (cultural changes are difficult), but the company is the biggest in its industry and with the right leadership could be the best. That should be worth a market multiple, a potential 25-30% return which we think has limited risk due to the low valuation and the 4% stock buyback this year which will likely be followed with more in 1998. H&R Block - This is a simple story. The company has a very good business in tax preparation (it owns its sector). With price increases and modest growth in customers, it can grow 10-12%/yr for the next five years. The company has almost on debt. Comparable companies sill at market multiples. H&R Block's valuation has been restrained by it investment in CompuServe, a computer on-line service. CompuServe has had profit difficulties due top the high cost of adding new subscribers. Since CompuServe became a public company a year ago, the problems have discouraged investors in H&R Block due to the uncertainty of how the CompuService problem will be solved. We don't think this is the right focus. We think it is highly probable the CompuServe situation will be resolved in some way sold, spun out to shareholders, or downsized -- and if our residual value of CompuService is correct, the remaining H&R Block is 20-25% undervalued. Added to this, we think a major stock repurchase will help us realize this potential. Owens-Corning -- UNDERVALUED. The stock (March 24, 1997)is selling at $40. The company is forecasting earnings of $4.85/sh. Wall Street analysts are more pessimistic, predicting only $4.75/sh. European operations are sluggish and the higher dollar is hurting the translation of foreign profits. But, even if the company's expectation are too high, or Wall Street analysts miss the forecast, this company sells at the lowest multiple of any firm in the industrial products category. In the past, this has been justified because of the large costs, of asbestos litigation and settlements. However, the number of new asbestos claimants is plummeting and the cost per case is stable. The uncertainty that has penalized valuation should be lifting. Prior to the asbestos turmoil. this stock sold at close to a market multiple. A significant valuation change is possible. Digital Equipment This company has: ------------------------------ Digital Equipment 1. $14 per share in cash. Corporation 2. The world's fastest microprocessor. 3. Over 10% of all Windows NT [LINE GRAPH APPEARS HERE] certified engineers. 4. #5 in the rapidly growing (Plot Points to Come) networking business. 5. The largest multi-vendor ------------------------------- computer service organization. Could these assets be undervalued? I have highlighted some of the stocks that we are currently enthusiastic about and will add to at today's prices and buy more enthusiastically at lower prices. We think stocks such as these will produce good returns and will have less risk in a market decline. To outperform in the future will also require limiting mistakes. You can see each day stocks of companies that failed to meet earnings expectations experience dramatic declines. We are trying to avoid these problems by getting more money into our highest confidence situations and reducing the number of stocks in the portfolio. We are also sticking with some of the stocks -- such as money center banks -- that have done well. Our investment thesis is that these companies are undergoing a valuation change. They are delivering 10% earnings growth -- growth that is above average -- so the stocks should sell closer to market multiples. In summary, our investment view is this: The market is overvalued because growth expectations are too high. We are preparing for a market correction, probably precipitated by the recent increase in interest rates (the long bond is yielding close to 7%, up .7%) or Federal Reserve actions in March or May. The place to be in the decline will not be the very large companies that I think are also overvalued, but more eclectic choices profiled above. We have about 20% of the portfolio in medium term bonds and defensive convertible preferred that we expect to use opportunistically as irresistible values appear. This has worked in the past and we think taking advantage of volatility will produce good relative returns over the next year. 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 Pelican Fund and the S&P 500 Index As of February 28, 1997
Average Annual Total Return Since Inception 1 Year 5 Year 5/31/89 18.6% 16.5% 13.4%
[LINE GRAPH APPEARS HERE]
Date GMO Pelican Fund S & P 500 Index ---- ---------------- --------------- 05/31/89 10,000 10,000 02/28/90 9,928 10,617 02/28/91 10,739 12,174 02/29/92 12,376 14,120 02/28/93 14,094 15,625 02/28/94 16,227 16,927 02/28/95 17,425 18,173 02/29/96 22,405 24,478 02/28/97 26,572 30,882
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. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period. The total returns would have been lower had certain expenses not been waived during the periods shown and do not include the effect of taxes on reinvested distributions. Past performance is not indicative of future performance. Information is unaudited. GMO International Bond Fund (A Series of GMO Trust) Annual Report February 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 22, 1997 GMO International Bond Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Par Value Description Value ($) - ---------------------------------------------------------------------------------------------------------- DEBT OBLIGATIONS - 89.4% Austria - 2.4% CAD 7,000,000 Autobahn Schnell, 8.50% due 3/3/03 5,704,880 -------------- Brazil - 0.4% USD 1,116,040 Brazil Capitalization Bond, PIK, 8.00% due 4/15/14 883,764 -------------- Bulgaria - 0.3% USD 1,000,000 Bulgaria Discount Bond Series B, Variable Rate, 6 mo. LIBOR + 1.31% (7.06%), due 7/28/24 628,750 -------------- Canada - 5.0% CAD 5,000,000 Government of Canada Real Return, 4.25% due 12/1/21 4,022,167 CAD 3,000,000 Government of Canada Real Return, 4.25% due 12/1/26 2,283,942 CAD 2,000,000 Province of British Columbia, 7.88% due 11/30/23 1,538,518 CAD 5,000,000 Societe Quebec D'Ass D'Eaux, 8.13% due 8/11/03 3,952,371 -------------- 11,796,998 -------------- Cayman Islands - 0.6% CAD 2,000,000 Government of Canada (Cayman), 7.25% due 6/01/08 1,501,939 -------------- Denmark - 6.2% DKK 52,500,000 Kingdom of Denmark Bullet, 7.00% due 12/15/04 8,652,314 DKK 34,500,000 Kingdom of Denmark, 8.00% due 11/15/01 5,992,757 -------------- 14,645,071 -------------- Ecuador - 0.4% USD 2,000,000 Republic of Ecuador Par Bond, Variable Rate, Step up (3.25%), due 2/28/25 900,000 -------------- France - 8.6% FRF 14,000,000 Auxiliare Credit Foncier, 10.00% due 4/20/01 2,938,936 SEK 10,000,000 Credit Foncier, 6.50% due 2/22/99 1,367,013 ECU 2,000,000 Credit Foncier, 8.375% due 3/17/04 2,593,272 ECU 7,000,000 Government of France, 8.25% due 4/25/22 9,482,800 ECU 3,000,000 Societe Nationale des Chemins de Fer, 9.38% due 3/12/01 3,979,569 -------------- 20,361,590 -------------- Germany - 3.1% ESP 250,000,000 Deutsche Ausgleichsbank, 8.60% due 5/22/03 1,896,582 GBP 2,000,000 Deutsche Pfandbriefe Bank, 6.50% due 12/31/98 3,235,265 ESP 280,000,000 KFW International Finance, 8.60% due 5/20/03 2,124,172 -------------- 7,256,019 -------------- Greece - 1.3% GRD 750,000,000 Hellenic Republic, Variable Rate, 12 mo. GTB + 1.50% (14.20%), due 9/30/03 2,949,343 --------------
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 28, 1997
Par Value Description Value ($) - ---------------------------------------------------------------------------------------------------------- Japan - 7.9% GBP 2,000,000 Export Import Bank of Japan, 10.75% due 5/15/01 3,659,455 JPY 400,000,000 Japan Development Bank, 6.50% due 9/20/01 4,035,131 GBP 2,000,000 Japan Finance Corp Municipal Enterprises, 9.125% due 2/16/05 3,558,302 GBP 4,000,000 Kobe City, 9.50% due 10/20/04 7,263,438 -------------- 18,516,326 -------------- Jordan - 0.3% USD 1,000,000 Hashemite Kingdom of Jordan Par Bond, Variable Rate, Step up (4.00%), due 12/23/23 144A 665,000 -------------- Mexico - 0.9% FRF 15,000,000 Mexico Par Bond, 6.63% due 12/31/19 2,145,753 -------------- New Zealand - 0.3% NZD 1,000,000 New Zealand Index Linked Bond, 4.50% due 2/15/16 655,411 -------------- Spain - 3.8% ESP 950,000,000 Government of Spain, 10.25% due 11/30/98 7,079,107 ESP 220,000,000 Government of Spain, 10.90% due 8/30/03 1,866,202 -------------- 8,945,309 -------------- Supranational - 3.0% JPY 175,000,000 Asian Development Bank, 5.00% due 2/5/03 1,694,320 SEK 10,000,000 International Finance Corp, 10.63% due 9/20/99 1,507,182 GBP 2,000,000 International Bank Recon and Development, 11.50% due 11/09/03 3,964,545 -------------- 7,166,047 -------------- Sweden - 6.0% SEK 20,000,000 Government of Sweden Index Linked Bond, 4.00% due 12/1/20 2,731,625 SEK 50,200,000 Kingdom of Sweden, 13.00% due 6/15/01 8,568,299 SEK 12,500,000 Kingdom of Sweden, 10.25% due 5/5/03 2,020,012 SEK 7,000,000 Kingdom of Sweden, 6.00% due 2/9/05 905,749 -------------- 14,225,685 -------------- United Kingdom - 1.7% GBP 2,000,000 Guaranteed Export Financial Corp, 12.88% due 9/29/02 4,067,330 -------------- United States - 36.5% Asset Backed Securities - 31.3% USD 5,000,000 Augusta Funding Series 1996-F2, Variable Rate, LIBOR + .30% (5.89%), due 4/15/06 144A 4,951,465 USD 5,000,000 Big Flower Receivables Master Trust 96-2 Class A, Variable Rate, LIBOR + .25% (5.88%), due 4/15/03 144A 5,006,250 USD 6,000,000 Circuit City Credit Card Master Trust 1996-1 Class A, Variable Rate, LIBOR + .17% (5.59%), due 10/15/06 6,003,750 USD 10,000,000 Discover Card Master Trust I 94-2 Class A, Variable Rate, 1 mo. LIBOR + .35% (5.77%), due 10/16/04 10,088,000
2 See accompanying notes to the financial statements. GMO International Bond Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Par Value Description Value ($) - ---------------------------------------------------------------------------------------------------------- Asset Backed Securities - continued USD 3,000,000 Eagle Pier Corp BV, Variable Rate, 6 mo. LIBOR + .25% (6.00%), due 10/03/01 3,015,000 USD 5,000,000 European Sovereign Investments, Variable Rate, 3 mo. LIBOR + .10% (5.60%), due 7/28/99 5,012,500 USD 4,000,000 First Chicago Master Trust II 95-0, Variable Rate, 1 mo. LIBOR + .23% (5.65%), due 2/15/04 4,015,000 USD 1,500,000 First International Funding Co, Variable Rate, 3 mo. LIBOR + .55% (6.05%), due 6/03/98 1,506,750 USD 5,000,000 First USA Credit Card Master Trust 94-4 Class A, Variable Rate, 1 mo. LIBOR + .37% (5.81%), due 8/15/03 5,044,150 USD 9,000,000 National Premier Finance 95-2, 6.21% due 6/01/99 144A 8,982,000 USD 5,000,000 National Premier Finance IX 96-1A, 7.20% due 7/01/00 5,080,000 USD 4,000,000 PARMA Food Corp BV, Variable Rate, 3 mo. LIBOR + .25% (5.87%), due 12/20/00 3,996,400 USD 5,966,000 SMS Student Loan 94-A Certificates, Variable Rate, 1 mo. LIBOR + .70% (6.51%), due 7/26/21 5,986,881 USD 5,000,000 Society Student Loan Trust 93-A Class B, Variable Rate, 1 mo. LIBOR + .75% (6.56%), due 7/25/03 5,007,813 ------------- 73,695,959 ------------- Structured Notes - 0.5% USD 1,000,000 Bankers Trust Medium Term Note, 17.10% due 10/14/97 (b) 1,135,500 ------------- U.S. Government Agency - 4.7% USD 3,000,000 Agency for International Development Floater (Support of Honduras), Variable Rate, 3 mo. U.S. Treasury Bill * 1.17% (5.82%), due 10/01/11 3,001,875 USD 1,000,000 Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10% (5.47%), due 2/01/27 1,004,063 USD 2,017,441 Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. U.S. Treasury Bill + .45% (5.73%), due 11/15/14 2,011,136 USD 333,333 Agency for International Development Floater (Support of Peru), Variable Rate, 6 mo. U.S. Treasury Bill + .35% (5.59%), due 2/01/02 331,667 USD 3,822,504 Agency for International Development Floater (Support of Peru), Variable Rate, 6 mo. U.S. Treasury Bill + .35% (5.58%), due 5/01/14 3,803,392 USD 996,547 National Oceanic & Atmospheric Administration Floater, Variable Rate, 6 mo. LIBOR + .50% (6.06%), due 6/15/08 997,792 -------------- 11,149,925 -------------- Total United States 85,981,384 -------------- Venezuela - 0.7% USD 2,000,000 Republic of Venezuela Discount Bond Series B, Variable Rate, 6 mo. LIBOR + .81% (6.44%), due 3/31/20 1,725,000 -------------- TOTAL DEBT OBLIGATIONS (Cost $208,869,222) 210,721,599 --------------
See accompanying notes to the financial statements. 3 GMO International Bond Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Par Value Description Value ($) - ---------------------------------------------------------------------------------------------------------- LOAN PARTICIPATIONS - 2.5% Ivory Coast - 0.5% FRF 15,000,000 Ivory Coast Credit Agreement (Participation with Banque Paribas, J.P. Morgan, Bank of America, Chase Manhattan and Salomon)* 1,132,115 ----------------- Russia - 2.0% ECU 1,000,000 Russia Vnesheconombank Loan Agreement (Participation with Bank of America)* 1,004,376 FRF 25,000,000 Russia Vnesheconombank Loan Agreement (Participation with Banque Paribas, Chase Manhattan, Bank of America, Lehman Brothers and J.P. Morgan)* 3,834,053 ----------------- 4,838,429 ----------------- TOTAL LOAN PARTICIPATIONS (Cost $2,513,026) 5,970,544 ----------------- Principal Amount CALL OPTIONS PURCHASED - 3.1% (000's omitted) Cross Currency Options - 2.5% DEM 140,700 DEM Call/BEF Put, Expires 4/11/97, Knock Out 20.5, Strike 20.5 550,065 ECU 89,700 ECU Call/DEM Put, Expires 5/14/97 Knock Out 1.894, Strike 1.894 2,258,112 ECU 137,800 ECU Call/DEM Put, Expires 6/13/97 Knock Out 1.9075, Strike 1.9075 2,431,457 ECU 64,500 ECU Call/DEM Put, Expires 7/24/97 Knock Out 1.915, Strike 1.92 674,699 ----------------- 5,914,333 ----------------- Options on Bonds - 0.5% USD 5,500 Brazil Discount Z, Expires 4/25/97, Knock Out 73.00, Strike 73.00 488,125 SEK 150,000 Sweden Government Bond 1033, Expires 4/11/97 Strike 117.725 583,548 ----------------- 1,071,673 ----------------- Options on Currency - 0.1% USD 13,000 German Mark, Expires 2/09/98 , Strike 1.61 331,500 ----------------- TOTAL CALL OPTIONS PURCHASED (Cost $5,264,164) 7,317,506 ----------------- PUT OPTIONS PURCHASED - 2.7% Cross Currency Options - 0.6% DEM 55,800 DEM Put/ITL Call, Expires 1/21/98 Strike 950 132,212 DEM 88,900 DEM Put/ITL Call, Expires 3/18/97 Strike 1025 1,184,841 ----------------- 1,317,053 ----------------- Options on Bonds - 0.0% USD 1,000 Venezuela Discount Bond, Expires 7/10/97 Strike 88.25 less DCB offer 3,290 ----------------- Options on Currency - 2.1% USD 53,700 French Franc, Expires 6/30/97 Strike 5.195 4,349,700 USD 13,000 German Mark, Expires 2/9/98 Strike 1.61 618,800 ----------------- 4,968,500 ----------------- TOTAL PUT OPTIONS PURCHASED (Cost $2,585,452) 6,288,843 -----------------
4 See accompanying notes to the financial statements. GMO International Bond Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Description Value ($) - ---------------------------------------------------------------------------------------------------------- RIGHTS AND WARRANTS - 0.0% Shares Venezuela - 0.0% 19,280 Republic of Venezuela Recovery Warrants, Expires 4/15/20 - ----------------- TOTAL RIGHTS AND WARRANTS (Cost $0) - ----------------- SHORT-TERM INVESTMENTS - 1.4% Par Value ($) Repurchase Agreement - 0.2% 451,365 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $451,547 and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $460,881. 451,365 ----------------- U.S. Government - 1.2% 3,000,000 U.S. Treasury Bill, 5.56% due 1/08/98 (a) 2,862,639 ----------------- TOTAL SHORT-TERM INVESTMENTS (Cost $3,291,053) 3,314,004 ----------------- TOTAL INVESTMENTS - 99.1% (Cost $222,522,917) * * 233,612,496 Other Assets and Liabilities (net) - 0.9% 2,170,627 ----------------- TOTAL NET ASSETS - 100.0% $ 235,783,123 =================
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 28, 1997 - -------------------------------------------------------------------------------- Notes to the Schedule of Investments: DCB - Debt Conversion Bond GTB - Greek Treasury Bill PIK - Payment In Kind Knock Out - Option will expire if underlying security reaches knock out price. (a) All or a portion of this security is held as collateral for open futures. (b) Principal is linked to the value of the Brazilian Capitalization Bond and the Brazilian IDU Bond. Restricted as to public resale. At the date of aquisition, this security was valued at cost. There were no outstanding unrestricted securities of the same class as those held. 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. Variable and step up rates - The rates shown on variable and step up rate notes are the current interest rates at February 28, 1997, which are subject to change based on the terms of the security. * Non-performing. Borrower not currently paying interest. ** The aggregate identified cost for federal income tax purposes is $222,629,914, resulting in gross unrealized appreciation and depreciation of $15,743,877 and $4,761,295, respectively, and net unrealized appreciation of $10,982,582. AUD - Australian Dollar GBP - British Pound BEF - Belgian Franc GRD - Greek Drachma CAD - Canadian Dollar ITL - Italian Lira CHF - Swiss Franc JPY - Japanese Yen DEM - German Mark NLG - Netherlands Guilder DKK - Danish Krone NZD - New Zealand Dollar ECU - European Currency Unit SEK - Swedish Krona ESP - Spanish Peseta USD - United States Dollar FRF - French Franc 6 See accompanying notes to the financial statements. GMO International Bond Fund (A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1997 -------------------------------------------------------------------------------------------------------- Assets: Investments, at value (cost $222,522,917) (Note 1) $ 233,612,496 Foreign currency, at value (cost $3,113,622) (Note 1) 3,586,173 Interest receivable 5,753,216 Receivable for open forward foreign currency contracts (Note 6) 12,292,835 Receivable for expenses waived or borne by Manager (Note 2) 50,565 ------------------ Total assets 255,295,285 ------------------ Liabilities: Written options outstanding, at value (premiums $1,200,550) (Note 6) 1,073,800 Payable to brokers for open futures contracts (Notes 1 and 6) 456,331 Payable for open forward foreign currency contracts (Note 6) 17,799,859 Payable to affiliate for (Note 2): Management fee 72,413 Shareholder service fee 27,155 Accrued expenses 82,604 ------------------ Total liabilities 19,512,162 ------------------ Net assets $ 235,783,123 ================== Net assets consist of: Paid-in capital $ 224,754,636 Accumulated undistributed net investment income 5,273,327 Accumulated undistributed net realized gain 786,358 Net unrealized appreciation 4,968,802 ----------------- $ 235,783,123 ================== Net assets attributable to: Class III shares $ 235,783,123 ================== Shares outstanding: Class III 21,873,511 ================== Net asset value per share: Class III $ 10.78 ==================
See accompanying notes to the financial statements. GMO International Bond Fund (A Series of GMO Trust) Statement of Operations - Year Ended February 28, 1997 -----------------------------------------------------------------------------
Investment income: Interest (including securities lending income of $5,992) $ 15,566,242 ----------------- Expenses: Management fee (Note 2) 849,645 Custodian and transfer agent fees 158,671 Audit fees 66,140 Registration fees 11,105 Legal fees 10,222 Trustees fee (Note 2) 1,032 Miscellaneous 2,043 Fees waived or borne by Manager (Note 2) (493,567) ----------------- 605,291 Shareholder service fee (Note 2) Class III 244,354 ----------------- Net expenses 849,645 ----------------- Net investment income 14,716,597 ----------------- Realized and unrealized gain (loss): Net realized gain (loss) on: Investments 8,015,644 Closed futures contracts 7,722,273 Written options 819,216 Foreign currency, forward contracts and foreign currency related transactions (891,450) ----------------- Net realized gain 15,665,683 ----------------- Change in net unrealized appreciation (depreciation) on: Investments (1,832,538) Open futures contracts (1,263,963) Written options (673,475) Foreign currency, forward contracts and foreign currency related transactions (4,030,210) ----------------- Net unrealized loss (7,800,186) ----------------- Net realized and unrealized gain 7,865,497 ----------------- Net increase in net assets resulting from operations $ 22,582,094 =================
8 See accompanying notes to the financial statements. GMO International Bond Fund (A Series of GMO Trust) Statement of Changes in Net Assets -----------------------------------------------------------------------------
Year Ended February 28, 1997 February 29, 1996 ----------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income $ 14,716,597 $ 15,920,549 Net realized gain 15,665,683 6,632,580 Change in net unrealized appreciation (depreciation) (7,800,186) 14,322,520 ----------------- ----------------- Net increase in net assets resulting from operations 22,582,094 36,875,649 ----------------- ----------------- Distributions to shareholders from: Net investment income Class III (15,718,077) (10,442,087) Net realized gains Class III (10,685,120) (5,446,434) In excess of net realized gains Class III (2,935,300) - ----------------- ----------------- (29,338,497) (15,888,521) ----------------- ----------------- Net share transactions: (Note 5) Class III 48,619,210 21,743,817 ----------------- ----------------- Total increase in net assets 41,862,807 42,730,945 Net assets: Beginning of period 193,920,316 151,189,371 ----------------- ----------------- End of period (including accumulated undistributed net investment income of $5,273,327 and $4,884,754, respectively) $ 235,783,123 $ 193,920,316 ================= =================
9 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, -------------------------------------------------------------- 1997 1996 1995 1994 * ------------ ---------- ---------- ---------- Net asset value, beginning of period $ 10.92 $ 9.64 $ 9.96 $ 10.00 ------------ ---------- ---------- ---------- Income from investment operations: Net investment income 0.71 0.62 0.98 0.08 Net realized and unrealized gain (loss) 0.65 1.55 (0.21) (0.12) ------------ ---------- ---------- ---------- Total from investment operations 1.36 2.17 0.77 (0.04) ------------ ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.81) (0.59) (0.75) - From net realized gains (0.54) (0.30) (0.34) - In excess of net realized gains (0.15) - - - ------------ ---------- ---------- ---------- Total distributions (1.50) (0.89) (1.09) - ------------ ---------- ---------- ---------- Net asset value, end of period $ 10.78 $ 10.92 $ 9.64 $ 9.96 ============ ========== ========== ========== Total Return (a) 12.39% 22.72% 8.23% (0.40%) Ratios/Supplemental Data: Net assets, end of period (000's) $ 235,783 $ 193,920 $ 151,189 $ 39,450 Net expenses to average daily net assets 0.40% 0.40% 0.40% 0.40%** Net investment income to average daily net assets 6.93% 8.17% 7.51% 5.34%** Portfolio turnover rate 95% 99% 141% 14% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.02 $ 0.01 $ 0.02 $ 0.01
* For the period from December 22, 1993 (commencement of operations) to February 28, 1994. ** Annualized. (a) Calculation excludes purchase premiums. The total return would have been lower had certain expenses not been waived during the periods shown. 10 GMO International Bond Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1997 - -------------------------------------------------------------------------------- 1. Significant accounting policies The 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 into classes. The Fund seeks high total return by investing primarily in investment grade bonds denominated in various currencies including U.S. dollars and multicurrency units. The Fund generally seeks to provide a total return greater than that provided by the international fixed income securities market. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. At February 28, 1997, Class III was the only active class of shares of the Fund. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 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. 11 GMO International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Certain investments in 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. 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 net exchange gains and losses on disposition of foreign currencies, 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 purchase of 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 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 held as of February 28, 1997. 12 GMO International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 28, 1997. Options The Fund may write call and put options on securities it owns or in which it may invest. 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 transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price 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. See Note 6 for a summary of open written option contracts as of February 28, 1997. The Fund may also purchase put and call options. 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. The risk associated with purchasing put and call options is limited to the premium paid. 13 GMO International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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. 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. Security lending The Fund may lend its securities to certain member firms of the New York Stock Exchange. 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 28, 1997, there were no securities on loan. 14 GMO International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to the differing treatments for foreign currency transactions and redemptions in- kind. Gains resulting from such in-kind transactions amounted to $1,877,485. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Undistributed Net Investment Accumulated Net Realized Income Gain/(Loss) Paid-in Capital ------------------------------------ ----------------------------- -------------------- $1,390,053 ($3,225,379) $1,835,326
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. 15 GMO International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 in such a manner as deemed equitable by the Trustees, 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 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 .15% of the amount invested. Effective June 1, 1996, the Manager will reduce such premium only when any portion of a purchase is offset by a corresponding redemption occurring on the same day. All purchase premiums are paid to and recorded as paid-in capital by the Fund. For the year ended February 28, 1997, the Fund received $150,377 in purchase premiums. There is no premium for cash redemptions, reinvested distributions or in-kind transactions. 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 and the possible imposition of currency exchange blockages 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. 2. Fees and other transactions with affiliates GMO earns a management fee paid monthly at the annual rate of .40% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .25% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .40%; thus the net annual expense ratio after the waiver for a Class III shareholder is unchanged. 16 GMO International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997, was $1,032. 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 28, 1997, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Proceeds ------------- ------------ U.S. Government securities $ 10,155,546 $ - Investments (non-U.S. Government securities) 207,780,621 183,295,275
4. Principal shareholders At February 28, 1997, 33% 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:
Class III: Year Ended Year Ended February 28, 1997 February 29, 1996 ----------------------------- -------------------------------- Shares Amount Shares Amount ----------- ------------ ------------ --------------- Shares sold 9,398,594 $108,940,870 11,762,649 $ 129,800,791 Shares issued to shareholders in reinvestment of distributions 2,130,615 23,653,871 1,091,175 11,864,446 Shares repurchased (7,421,298) (83,975,531) (10,775,703) (119,921,420) ----------- ------------ ------------ --------------- Net increase 4,107,911 $ 48,619,210 2,078,121 $ 21,743,817 =========== ============ ============ ===============
17 GMO International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 6. Financial instruments A summary of outstanding financial instruments at February 28, l997 is as follows:
Forward currency contracts Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ----------------- --------------- ----------------- ------------- ------------------- Buys 04/24/97 CAD 11,300,000 $ 8,297,993 $ (102,994) 04/25/97 FRF 7,089,180 1,248,637 (2,386) 03/07/97 DEM 311,500,000 184,594,637 (12,765,948) 03/20/97 DEM 15,400,000 9,133,251 (712,478) 04/18/97 GBP 7,200,000 11,735,949 80,720 03/20/97 ITL 34,498,134,000 20,389,932 (1,988,454) 04/10/97 JPY 7,120,000,000 59,344,864 (1,401,913) ------------------- $ (16,893,453) ------------------- Sales 05/23/97 AUD 5,700,000 $ 4,419,769 $ (60,979) 04/24/97 CAD 34,600,000 25,408,015 437,098 03/07/97 DEM 142,600,000 84,504,640 7,448,217 03/20/97 DEM 33,300,000 19,749,172 2,629,214 04/25/97 DEM 2,100,000 1,248,288 2,658 04/18/97 GBP 13,100,000 21,352,908 520,867 03/20/97 ITL 15,206,345,000 8,987,626 858,103 04/10/97 JPY 970,000,000 8,084,904 93,596 03/21/97 NZD 950,000 656,378 10,806 ------------------- $ 11,939,580 ===================
18 GMO International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward cross currency contracts
Net Unrealized Settlement Appreciation Date Deliver/Units of Currency Receive/In Exchange for (Depreciation) ------------ -------------------------- ------------------------ -------------- 03/14/97 DEM 86,800,000 NLG 97,542,560 $ (41,375) 03/20/97 DEM 14,700,000 ITL 14,756,112,000 3,415 04/25/97 DEM 19,500,000 FRF 65,821,633 2,100 04/28/97 DEM 133,812,539 ECU 69,100,000 38,799 05/05/97 DEM 20,000,000 CHF 17,305,000 (81,645) 05/07/97 DEM 20,300,000 SEK 89,912,680 (55,508) 07/23/97 DEM 21,600,000 ESP 1,828,054,500 (188,917) 04/28/97 ECU 49,500,000 DEM 95,893,875 (5,887) 04/25/97 FRF 675,434 DEM 200,000 (81) 03/20/97 ITL 44,412,547,000 DEM 44,400,000 82,439 03/14/97 NLG 63,720,179 DEM 56,800,000 84,803 05/06/97 SEK 98,553,420 DEM 25,800,000 (9,376) 05/07/97 SEK 268,500,750 DEM 59,700,000 (381,918) -------------- $ (553,151) ==============
19 GMO International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Futures contracts
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) - --------- --------------------------------- --------------- ------------- ------------------ Buys 75 Australian Government Bond 3 Year March 1997 $ 6,834,195 $ (28,047) 129 Australian Government Bond 10 Year March 1997 13,351,797 (308,990) 63 Canadian Government Bond 10 Year June 1997 5,377,287 (51,516) 36 German Government Bond June 1997 5,451,799 (8,282) 100 Italian Government Bond 10 Year June 1997 15,164,077 (293,758) 4 Japanese Government Bond 10 Year June 1997 4,118,210 2,113 77 MATIF ECU Bond March 1997 9,301,604 139,578 56 MATIF ECU Bond June 1997 6,192,116 (29,077) 150 U.K. Gilt March 1997 14,062,427 186,546 213 U.K. Gilt June 1997 19,394,528 (154,292) 13 U.S. Treasury Bond June 1997 1,435,688 (910) ------------------ $ (546,635) ================== Sales 78 French Government Bond 10 Year March 1997 $ 9,969,652 $ (306,028) 127 French Government Bond 10 Year June 1997 14,615,354 (23,251) 132 Spanish Government Bond 10 Year June 1997 10,365,268 195,130 68 Swiss Government Bond March 1997 6,340,242 (312,273) 14 Swiss Government Bond June 1997 1,143,613 (2,863) 30 U.S. Treasury Note 5 Year June 1997 3,172,969 18,962 10 U.S. Treasury Note 10 Year March 1997 1,083,438 23,988 27 U.S. Treasury Note 10 Year June 1997 2,907,563 2,985 100 U.S. Treasury Bill June 1997 23,692,500 30,450 ------------------ $ (372,900) ==================
At February 28, 1997, the Fund has cash and/or securities to cover any margin requirements on open futures contracts. 20 GMO International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Written option transactions
Puts Calls Principal Principal Amount Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ------------------ ---------- ----------------- ----------- Outstanding, beginning of period 8,000 $ 404,000 2,018,000 $ 759,925 Options written 13,000 646,750 2,113,000 613,090 Options exercised (8,000) (404,000) - - Options expired - - (4,118,000) (819,215) ------------------ ---------- ----------------- ----------- Outstanding, end of period 13,000 $ 646,750 13,000 $ 553,800 ================== ========== ================= =========== Summary of written options outstanding Principal Amount of Contracts (000's omitted) Exercise Price Expiration Date Value ------------------- -------------- --------------- ----------- Calls Japanese Yen Call 13,000 JPY 117.00 JPY 02/09/98 $ 429,000 Puts Japanese Yen Put 13,000 JPY 117.00 JPY 02/09/98 644,800 ---------- $ 1,073,800 ==========
See Notes to the Schedule of Investments for definitions of currency abbreviations. 21 GMO International Bond Fund (A Series of GMO Trust) Federal Income Tax Information on Distributions - (Unaudited) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all the Fund's distributions are from investment company taxable income, except that the Fund has designated 14.52% of distributions as net capital gain dividends. 22 [THIS PAGE INTENTIONALLY LEFT BLANK] GMO International Bond Fund (A Series of GMO Trust) Portfolio Managers - ------------------ Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. since 1993. Management Discussion and Analysis of Fund Performance - ------------------------------------------------------ The Class III shares of the International Bond Fund returned 12.4% for the fiscal year ended February 28, 1997, compared to 1.7% 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 past year was an exceptional period for the Fund. It outperformed its benchmark by 10.7% by following a variety of successful strategies. During the year, bond market selection, currency selection and the decision to include emerging country debt added value above the benchmark return in each quarter. Although foreign interest rates generally declined during the year, the strength of the U.S. dollar meant that many foreign bond markets performed poorly. This was especially true in Japan, the second largest bond market in he world, where the bond market produced a total return (in U.S. dollars) of -5.1% for the twelve months ended February 28, 1997. The Fund was significantly underweight in the Japanese market throughout the year and overweighted many of the high yielding bond markets. The bond markets in Italy, Spain and Sweden rose strongly on increased confidence in the European Monetary Union (EMU). The Fund was overweight in the U.K. pound, one of the few currencies which outperformed the U.S. dollar. During the year the Fund held a position in emerging country sovereign debt, emphasizing undervalued issues. The strong bull market resulting from improved country fundamentals and renewed investor confidence produced index returns of more than 40% and helped the Fund exceed its benchmark's return. Outlook - ------- The Fund is structured to benefit from outperformance in the Australian, Canadian, Danish, U.K., Swedish and emerging bond markets. We expect underperformance from the French, Japanese, Spanish and Swiss bond markets. Our strategy maintains a market duration in each country. Strong relative performance is expected from the U.K. pound, Dutch guilder, Italian lira, Spanish peseta, Swiss franc and U.S. dollar. The Australian dollar, Belgian franc, Canadian dollar, French franc, Deutschemark and Swedish krona 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 JP Morgan Non-U.S. Government Bond Index As of February 28, 1997 Average Annual Total Return
Since Inception 1 Year 5 Year 12/22/93 Class III 12.3% n/a 13.2%
[LINE GRAPH APPEARS HERE]
Date GMO International Bond Fund J.P. Morgan Non-U.S. Government Bond Index 12/22/93 9,985 10,000 02/28/94 9,945 9,934 02/28/95 10,764 10,930 02/29/96 13,198 12,339 02/28/97 14,848 12,550
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. 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 paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Class I shares and Class II shares have not commenced operations. Past performance is not indicative of future performance. Information is unaudited. GMO Emerging Markets Fund (A Series of GMO Trust) Annual Report February 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 17, 1997 GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- STOCK AND EQUIVALENTS - 96.3% Argentina - 4.5% 3,738,978 Acindar Industria Argentina de Aceros SA Class A * 7,013,389 5,686,520 Alpargatas SA * 5,518,132 36,000 Astra Cia Argentina 65,186 821,616 Atanor SA D Shares 1,397,306 200,940 Capex SA Class A (Voting) 1,889,592 1,013,454 Central Costanera Class B (Voting) 3,396,429 1,459,500 Central Puerto B Shares 4,453,256 9,909,657 Cia Celulosa Argentina SA Class B * 2,230,565 322,013 Ciadea SA (Bearer) * 1,659,028 199,607 Corcemar Class B * 1,228,074 156,122 Fiplasto Class B 687,212 1,494,939 Garovaglio Y Zorraquin 5,159,603 873,823 Indupa SA Industrial y Comercial * 1,075,232 269,229 Juan Minetti SA 1,171,615 1,502,459 Ledesma SA 1,818,703 328,998 Nobelza Piccardo 1,701,600 67,983 Pirelli Cables Industria * 180,227 904,358 Polledo * 1,040,428 337,950 Quimica Estrella Class B 439,511 45,970 Quimica Estrella Preferred 10% * 45,988 468,308 Rigolleau Christalerias Preferred * 557,510 630,553 Sevel Argentina Class 1 1,577,013 3,099,418 Siderca 6,294,336 53,200 Telecom Argentina SA ADR 2,560,250 62,200 Telefonica de Argentina ADR 1,967,075 1,284,000 Transportadora De Gas Del Sur Class B 3,288,355 741,503 YPF SA ADR 19,835,205 ------------------ 78,250,820 ------------------ Brazil - 9.7% 6,531,000 Acos Villares SA Preferred 1,553,520 35,870,000 Alpargatas de Sao Paulo Preferred 2,218,411 2,300,000 Alpargatas de Sao Paulo 146,622 1,557,000 Aracruz Cellulose Class B Preferred 2,844,377 354,319,000 Banco Estado Sao Paulo Preferred 1,415,928 148,940,000 Banco Nacional Preferred (b) 1,417 33,740,000 Belgo Mineira Preferred (Registered) 3,049,762 4,400,000 Belgo Mineira (Registered) 401,903 119,000,000 Bombril SA Preferred 1,912,379 2,319,000 Brasinca Industrial SA Preferred 88,259
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Brazil - continued 30,402,000 Caemi Mineracao e Metalurgica SA Preferred 1,706,677 518,600,000 Cemig Preferred 20,896,965 2,321,557 Centrais Electric Preferred Class B * 3,224,998 143,400,000 Ceva Ceval Alimentos SA Preferred 1,678,230 162,100,000 Cia Energetica de Sao Paulo SA Preferred (Registered) * 8,868,459 246,500,000 Cia Hering Preferred (Registered) 1,620,661 16,000,000 Copel PNA 190,295 12,689,000 Copene-Petroquimica do Nordeste SA Class A Preferred 4,666,316 3,937,000 Cosipa PN Class B * 3,408,820 9,800,000 Electrobras 4,307,897 60,023,771 Electrobras Class B Preferred (Registered) 27,241,997 69,600,000 Ericsson Telecom Perferred 1,874,101 493,500 Estrela SA Preferred * 225,385 543,000,000 Fertilizantes Fosfatados Preferred 2,195,766 1,300,000 Iochpe Maxion Preferred 118,126 262,400,000 Iparanga Brasil De Petroleo Preferred 3,919,772 7,230,000 Light Particpacoes * 2,140,108 42,420,000 Mesbla Preferred (Registered) * 201,808 335,746,000 Olvebra Preferred * 25,556 205,500,000 Petrobras Distrib Preferred 4,106,089 63,210,000 Petroleo Brasileiro SA Preferred 12,930,685 770,000 Sadia Concordia Preferred (Registered) 534,824 30,200,000 Siderurgica de Nacional 1,112,027 583,800,000 Siderurgica de Tubarao Preferred Class B 9,831,836 476,803,993 Siderurgica Riograndense Preferred (Registered) 9,118,706 172,850,000 Telecomunicacoes Brasileiras SA 16,362,366 5,830,152 Unipar Preferred 2,662,676 6,007,400,000 Usiminas Preferred 6,916,226 673,000 Varig Preferred (Registered) * 1,280,685 ------------------ 167,000,635 ------------------ Chile - 1.8% 38,800 Banco de Santiago Sponsored ADR 1,081,550 22,000 Chile Fund Inc 530,750 25,400 Chilectra SA Sponsored ADR 1,682,496 100,000 Chilgener ADR 2,525,000 47,000 Chilquinta Sponsored ADR 716,750 94,200 Chilquinta Sponsored ADR 144A 1,436,550 153,000 Compania de Telefones de Chile ADR 4,475,250 63,000 Conchatoro (Vina De Concha) ADR 1,771,875 14,200 Cristalerias de Chile SA ADR 317,725
See accompanying notes to the financial statements. 2 GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Chile - continued 46,900 Embotelladora Andina Sponsored ADR 1,711,850 192,700 Empresa Natl de Electricidad ADR 3,709,475 77,500 Enersis SA ADR 2,567,188 1,330,000 Five Arrows Chile Investment Trust Ltd 4,116,350 110,800 Maderas Y Sinteticos Soc ADR 1,842,050 45,500 Soc Quinica Y Min de Chile ADR 2,650,375 ------------------ 31,135,234 ------------------ China - 1.5% 3,150,000 Chengdu Telecom Cable Class H * 447,443 110,000 China Estn Airlns Ltd Spon ADR * 2,406,250 953,315 China First Pencil Class B 486,191 3,826,000 Dongfang Electrical Machinery Class H 1,284,556 930,000 Guangdong Kelon Elec Holding H 828,642 25,000 Guangshen Railway Sponsored ADR * 603,125 7,034,000 Harbin Power Equipment Class H 1,289,809 59,650 Huaneng Power International ADR * 1,312,300 10,616,000 Maanshan Iron & Steel Class H 2,481,271 4,140,000 Northeast Electrical Transmission & Transformation Machinery Manufacturing Company Ltd Class H 657,567 5,004,000 Qingling Motor Co Ltd 3,037,035 1,172,900 Shanghai Chlor-Alkali Chemical Co Class B 372,982 3,893,989 Shanghai Erfangji Textile Machinery Co Ltd Class B * 708,706 520,992 Shanghai Haixing Shipping Co Ltd Class B 255,286 2,408,000 Shanghai Haixing Shipping Co Ltd Class H 254,979 1,311,115 Shanghai Hero Co Ltd Class B 545,424 12,244,000 Shanghai Petrochemical Co Class H 3,478,409 481,580 Shanghai Phoenix Bicycle Class B * 79,942 735,000 Shenzhen China Bicycle Co Class B * 336,938 1,001,000 Shenzhen Konka Electronic Class B 1,169,815 9,210,000 Tianjin Bohai Chemical Industry (Group) Co Ltd Class H 987,126 8,860,000 Yizheng Chemical Fibre Co 2,070,842 ------------------ 25,094,638 ------------------ Colombia - 0.0% 26,200 Banco Ganadero SA Sponsored ADR 802,375 ------------------ Czech Republic - 2.8% 18,000 Alpha Effect 500,703 9,300 Bohatstvi * 263,481 52,000 Cez Ii 1,640,885 47,200 CEZ 1,950,815 15,000 Chemopetrol Group AS 732,636
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Czech Republic - continued 19,000 CKD Praha Holding AS * 651,689 60,934 Czech Republic Fund Inc 929,244 38,397 IF Zivnobanka 644,011 403,249 IPS Praha * 4,356,832 58,456 Izohorskie Zavody * 1,958,276 18,200 Kaucuk Group AS 936,999 197,800 Komercni Bank AS GDR 144A 6,923,000 98,600 Komercni Bank AS GDR (Registered) 3,451,000 9,800 Komercni Banka 238,992 2,870 Leciva AS * 243,637 5,272 Metrostav AS 510,835 1,820 Metrostav AS Rights 1/30/97 * 93,637 64,000 PF IKS KB Plus 419,276 31,000 PIF (Privat Inv Fond) 485,920 62,300 RIF 2,247,971 16,624 Sepap AS * 691,645 111,231 Skoda Koncern 4,387,434 367,188 SP Vseobecny * 1,171,274 27,366 Spif Cesky 345,419 182,980 Spif Vynosovy 1,311,707 17,000 Sporitelni Preferred * 447,230 74,470 SPT Telecom AS * 9,655,174 1,926 Stavby Silnic A Zeleznic SA 89,909 28,350 Synthesia * 264,490 74,433 Zivnobanka Preferred 1,217,786 ------------------ 48,761,907 ------------------ Egypt - 0.6% 84,000 Al Ahram Beverages Co GDR * 1,465,800 23,000 Alexandria Cement 464,407 23,990 Eastern Company Tobacco 707,148 14,800 Egyptian International Pharm Investment 911,776 117,800 Helwan Cement Co 2,656,360 17,810 Middle Egypt Flour Mills 308,427 37,881 Suez Cement Co GDR 144A * 723,527 85,000 Suez Cement Co GDR (Registered) * 1,623,500 24,623 Suez Cement Co 528,242 60,250 Torrah Portland Cement 1,487,380 12,000 Upper Egypt Flour Mills 306,464 ------------------ 11,183,031 ------------------
4 See accompanying notes to the financial statements. GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Greece - 2.3% 94,170 Aegek 572,377 53,600 Alpha Credit Bank (Registered) 4,662,463 97,280 Alpha Leasing (Registered) 2,293,092 31,400 Aluminum of Greece Preferred 10.41% 1,700,952 8,430 Aluminum of Greece (Registered) 477,675 673,470 Balkan Export * 610,580 236,900 Boutaris Wine Co * 241,625 227,346 Commercial Bank of Greece (Registered) 9,189,340 75,740 Delta Dairy SA Common 987,092 530 Delta Dairy SA Preferred 5,095 8,940 Econ Viomihanies (a) * 7,700 68,807 Ergo Bank SA (Registered) 4,053,510 80,880 Etba Leasing (Registered) 947,144 87,500 Etma Rayon Manufacturing 231,377 245,820 Hellenic Sugar Industry 1,996,498 33,000 Hellenic Technodom SA 550,000 29,050 Ionian Bank (Registered) 641,971 25,800 Michaniki SA (Registered) 283,808 103,000 Naoussa Spinning Mills SA 400,763 87,575 National Bank of Greece (Registered) 8,998,338 6,250 National Investment Bank for Industrial Development (Registered) 242,001 13,500 National Mortgage Bank of Greece 856,754 26,750 Petzetakis SA Preferred * 68,714 14,500 Petzetakis SA * 67,647 42,190 Shelman 245,439 41,000 Strintzis Lines SA 154,106 ------------------ 40,486,061 ------------------ Hungary - 1.4% 3,280 Cofinec Sponsored GDR 144A * 107,830 89,972 Danubus Hotel (Registered) * 2,872,728 38,614 Egis Gyogysergyar 2,287,650 2,493,951 Fotex (Registered) * 1,960,553 46,046 Graboplast (Registered) 2,152,197 8,293 Matav (Registered) * 2,692,763 140,000 Mol Magyar Olay GDR 144A 2,467,500 62,800 OTP Bank GDR 1,334,500 24,982 OTP Bank (Registered) 533,667 67,912 Pannonplast Muanyagipari 3,094,910 37,826 Pick Szeged (Bearer) 2,531,861 7,316 Richter Gedeon Vegyeszeti Gyar 500,945
See accompaying 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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Hungary - continued 68,000 Tiszai Vegyi Kombinat GDR 144A * 875,500 15,000 Tiszai Vegyi Kombinat GDR (Registered) * 193,125 22,751 Zalakeramia AG 1,077,641 ------------------ 24,683,370 ------------------ India - 7.4% 481,000 Arvind Mills Ltd GDR 2,405,000 492,800 Arvind Mills Ltd 1,991,527 25,000 Ashok Leyland GDR 144A * 228,125 414,600 Ashok Leyland Ltd GDR 3,783,225 227,800 Ballarpur Industries 412,681 460,300 Bombay Dyeing & Manufacturing Co Ltd GDR * 1,829,693 155,000 BSES Ltd 1,041,109 40,000 BSES Ltd GDR 844,000 104,000 BSES Ltd Sponsored GDR 144A 2,194,400 2,500 Century Textiles & Industrial GDR * 157,500 697,000 Cesc Ltd GDR 1,045,500 591,804 Core Parentals Ltd GDR 295,902 45,000 DCW Ltd GDR 90,000 975,700 Escorts 2,338,634 20,600 Excel Industries 131,936 254,000 Finolex Cables Ltd GDR 1,111,250 255,520 Garden Silk Mills Ltd GDR 255,520 337,500 Glaxo India Ltd 2,727,372 76,500 Grasim Industries 884,824 45,000 Great Eastern Shipping Co GDR 144A 343,125 261,000 Great Eastern Shipping Co Ltd GDR 1,990,125 1,902,800 Great Eastern Shipping Co 2,386,455 114,300 Hindalco Industry GDR 3,046,095 4,480 Hindustan Ciba Geigy 443,255 100,000 Hindustan Development Corp GDR 18,000 494,000 Hindustan Development Corp GDR 144A 88,920 404,000 Hindustan Petroleum 4,380,045 469,770 India Cements GDR 1,127,448 600,000 India Fund Class B 939,744 186,300 India Fund Inc 1,583,550 60,000 Indian Aluminum 144A 232,500 270,100 Indian Petrochemical Co Ltd GDR 3,416,765 135,000 Indian Rayon & Industries GDR 1,299,375 250,000 Indo Gulf Fertilizer 232,720 1,265,000 Indo Gulf Fertilizers GDR 948,750
See accompanying notes to the financial statements. 6 GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- India - continued 90,000 Indo Gulf Fertilizers GDR 144A 67,500 273,130 Industrial Credit & Investment GDR 144A * 2,697,159 803,600 Industrial Development Bank of India 2,082,910 593,000 Industrial Finance Corp of India 506,562 1,711,000 Industry Credit & Investment Corp 3,111,559 550,000 ITC Ltd 6,568,423 100,000 Jain Irrigation Systems Ltd EDR 50,000 2,630,900 Jaiprakash Industries Ltd 1,587,486 201,000 JCT Ltd GDR Class S 402,000 325,000 JK Corp GDR (Registered) 243,750 241,000 Larsen & Toubro 1,699,359 264,200 Larsen & Toubro GDR 3,725,220 75,833 Mahindra & Mahindra GDR 936,538 160,000 Mahindra & Mahindra 1,658,863 1,212,000 National Aluminum 1,314,013 100,000 NEPC Micon Ltd GDR 144A 35,000 210,500 NIIT 2,040,759 1,016,300 Oriental Bank of Commerce 2,181,023 14,000 Parke Davis & Co Ltd 66,332 27,600 Raymond Woolens GDR 148,350 1,125,800 Reliance Industries Ltd GDR 19,194,890 1,068,000 Reliance Industries 8,853,863 83,000 Sanghi Polyesters GDR 144A (Registered) * 62,250 50,000 Sanghi Polyesters GDS 144A 37,500 664,000 Scici Ltd 481,159 120,000 Siemens India 1,103,344 572,500 Siv Industries GDR 143,125 55,000 Smithkline Beecham Plc 433,501 225,000 Southern Petrochem GDR 144A 871,875 346,000 Southern Petrochem Industry Corp 280,137 146,432 State Bank of India GDR 144A * 2,928,640 530,500 State Bank of India 4,670,707 245,000 Steel Industry of India GDR 144A 2,205,000 111,000 Sterlite Industries Ltd 848,278 46,000 Sterlite Industries Ltd GDR 253,000 791,000 Tata Iron & Steel 4,510,552 33,333 Tube Investment of India GDR 41,666 57,333 Tube Investment of India GDR 144A 71,666 78,000 Usha Beltron GDR 144A 117,000 212,000 Usha Beltron Ltd GDR 318,000
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- India - continued 1,359,500 Uti Masterplus 1991 Unit * 538,041 736,600 Videocon International 872,506 545,000 Videocon International Ltd GDR 490,500 69,150 Zuari Argochemicals Ltd 539,632 ------------------ 127,234,708 ------------------ Indonesia - 1.5% 831,500 Astra International (Foreign Registered) 2,843,921 5,126,000 Bakrie & Brothers (Foreign Registered) 2,351,867 104,500 Bank Bali (Foreign Registered) Warrants Exp 8/29/2000 * 74,098 622,000 Barito Pacific Timber (Foreign Registered) 564,275 50,000 Cipendawa Farm Enterprise (Foreign Registered) 21,376 171,000 Ciputra Development New (Foreign Registered) 164,046 1,562,000 Dharmala Intiland (Foreign Registered) 2,329,155 1,473,000 Duta Anggada Realty (Foreign Registered) 1,367,018 3,506,000 Gadjah Tunggal (Foreign Registered) 1,681,710 218,000 GT Petrochem Industries (Foreign Registered) 93,201 860,874 Indah Kiat Pulp & Paper (Foreign Registered) 637,352 177,318 Indah Kiat Pulp & Paper (Foreign Registered) Warrants Exp 4/13/01 65,084 236,000 Indorayon (Foreign Registered) 164,880 2,713,000 Jakarta International Hotel and Development (Foreign Registered) 2,489,510 2,039,500 JAPFA Comfeed (Foreign Registered) 1,573,754 368,000 Jaya Real Property (Foreign Registered) 529,552 387,000 London Sumatra (Foreign Registered) * 1,041,147 153,500 Modernland Realty (Foreign Registered) 89,635 295,000 Pabrik Kertas Tjiwi (Foreign Registered) 332,221 2,031,500 Pakuwon Jati (Foreign Registered) 889,708 4,976,200 Panasia Indosyntec (Foreign Registered) 1,401,016 682,000 Rig Tenders Indonesia (Foreign Registered) 426,694 798,000 Semen Cibinong (Foreign Registered) 2,421,373 932,000 Sinar Mas Agro (Foreign Registered) 777,477 921,550 Ungul Indah Corp (Foreign Registered) 1,230,015 ------------------ 25,560,085 ------------------ Korea - 7.1% 89,570 ANAM Industrial Co Preferred 5.15 588,601 21,496 ANAM Industrial Co 288,487 88,100 Asia Motor * 530,017 101,480 Bank of Pusan 773,706 47,431 Cheil Food & Chemical 2,123,653 286,730 Cheil Industries 3,449,982 82,215 Cho Hung Bank Co Ltd 469,929
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Korea - continued 50,000 Cho Hung Bank GDR 144A 298,750 84,300 Choongnam Spinning * 908,004 19,520 Chosun Brewery Co Ltd Preferred 176,151 70,280 Chosun Brewery Co Ltd 2,025,220 82,300 Coryo Securities Preferred * 285,648 154,758 Daegu Bank 1,561,071 188,260 Daelim Industrial Co Ltd 1,779,469 548,970 Daewoo Corp 3,778,992 190,400 Daewoo Heavy Ind Ltd Preferred 649,829 159,250 Daewoo Securities Ltd Preferred 15.98% 902,788 24,600 Daihan Investment and Finance Preferred 23.40% 145,150 140,900 Daishin Securities Preferred 18.00% * 544,462 55,900 Dongbu Construction Co Preferred 242,523 102,340 Dongbu Steel Preferred 686,726 210,600 Dongsuh Securities Preferred 782,121 33,500 Dongwon Securities Co Preferred 170,533 12,000 Dongwon Securities Co 107,595 24,800 Doosan Beverage Co Ltd 803,378 66,120 Haitai Confectionery Co Ltd 1,002,108 41,770 Haitai Confectionery Preferred 216,497 30,000 Han Dok Preferred * 168,335 140,603 Hana Bank 1,816,200 150,457 Hanil Bank 800,720 175,000 Hanil Synthetic Fiber Industry Co Preferred * 421,126 203,690 Hanil Synthetic Fiber Industry Co * 1,142,936 61,500 Hanshin Construction Preferred * 160,091 5,445 Hansol Paper Manufacturing Ltd 122,211 32,800 Hansol Paper Manufacturing Ltd Preferred 326,349 33,535 Hanwha Chemical Corp 314,263 75,700 Hanwha Chemical Corp Preferred 350,321 232,406 Hanwha Corp 2,957,675 10,840 Hanwha Corp Preferred 66,845 335,319 Hyundai Engineering & Construction GDR 144A * 1,341,276 110 Hyundai Engineering & Construction * 2,405 45,000 Hyundai Fire & Marine Insurance 1,634,754 363,325 Hyundai Motor Service Co GDR 144A * 2,670,439 53,123 Hyundai Motor Service Co Ltd 1,266,077 63,700 Hyundai Motor Service Co Preferred 619,055 14,200 Inchon Iron & Steel 225,071 70,000 Jindo Corp Preferred 332,041
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Korea - continued 1,400 Jindo Corp 18,303 60,920 Jinro Ltd 1,113,595 27,670 Jinro Ltd Preferred 192,075 19,000 Kang Won Industrial Co 312,142 71,930 Kang Won Industrial Preferred (Non Voting) 467,689 6,400 Keum Kang Ltd 288,772 11,710 Kia Steel Co Ltd * 46,062 61,746 Kolon Construction 571,491 39,500 Kolon Construction Co Ltd Preferred 2.03% 155,377 824 Kolon Industries 15,730 59,400 Kolon Industries Preferred 357,355 7,861 Kolon International Corp 56,842 21,200 Kolon International Corp Preferred 84,619 9,670 Korea Container Terminal 783,132 20,000 Korea Electric Power Sponsored ADR 360,000 73,460 Korea Exchange Bank 492,085 14,400 Korea Express Co Ltd 314,872 615,314 Korea First Bank 2,491,582 112,980 Korea Housing Bank 1,866,291 81,800 Korea Kumho Petrochemical 548,898 150,491 Korea Long Term Credit Bank 2,241,652 121,660 Korean Air Lines * 2,201,028 120,360 Kumho Construction & Engineering Co Ltd 717,133 168,700 Kumho Construction & Engineering Co Ltd Preferred 472,325 177,500 Kumho Petrochemical Preferred 821,427 69,600 Kumho & Co Inc Preferred 2.02% * 239,153 600 Kun Sul Chemical Industry 44,496 117,930 Kun Young Construction * 341,094 194,506 Kwanju Bank 1,170,164 8,008 Kyungbang Co Ltd 481,768 86,770 Kyungnam Bank 753,911 11,910 Kyungnam Wool Textile Preferred 49,605 73,100 LG Chemicals Ltd 794,979 122,400 LG Chemicals Ltd Preferred 647,155 8,966 LG Merchant Banking Corp New * 114,104 19,200 LG Merchant Banking Corp 264,337 91,000 LG Metals Corp 1,358,130 65,000 LG Securities Co Preferred * 315,844 12,130 Lotte Chilsung Beverage 1,445,468 25,000 Mando Machinery Preferred 309,481
10 See accompanying notes to the financial statements. GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Korea - continued 6,440 Miwon Petrochemical Preferred 28,313 16,500 Monami Co Ltd * 500,145 82,656 NyoSung T-C Co Ltd 1,969,935 37,400 Oriental Brewing Co Ltd Preferred * 462,984 67,728 Oriental Chemical Preferred 1.66% 509,321 34,520 Ottogi Foods 1,385,832 26,840 Pang Rim Spinning 1,204,827 132,140 Pohang Iron & Steel 8,743,086 23,800 Pohang Iron & Steel Co ADR 464,100 7,440 Sam Whan Corp 109,317 31,000 Sam Whan Corp Preferred 164,979 7,170 Sam Yang Preferred 64,703 82,250 Samho International * 342,570 65,800 Sammi Corp Preferred * 86,023 51,800 Samsung Corp 588,507 778 Samsung Display Devices 41,469 49,310 Samsung Display Devices Preferred 1,112,449 24,700 Samsung Electro Mechanics Co Preferred 271,190 196,658 Samsung Electronics GDS (Non Voting) 3,834,831 35,077 Samsung Electronics Ltd 2,859,809 460,000 Samsung Electronics Preferred (Non Voting) 16,987,563 55,407 Seah Steel Corp 1,410,255 162,800 Seoul Bank * 695,010 41,922 Shin Sung Corp 376,369 13,380 Shin Wha Engineering & Construction Co Preferred 1.52% 65,170 1,338 Shin Wha Engineering & Construction Co 14,861 79,211 Shinhan Bank 1,178,749 54,552 Shinsegae Department Store 2,196,344 49,340 Shinwon Preferred 285,988 101,300 Shinyoung Securities Preferred 627,009 177,000 Ssangyong Cement 2,375,427 56,600 Ssangyong Investment Securities Co Preferred * 258,657 40,670 Ssangyong Oil Refining 894,001 27,100 STC Corp Preferred (Non Voting) 153,630 15,140 Sung Chang Enterprise Co * 858,287 26,460 Sungwon Constuction Preferred 132,553 45,240 Sunkyong Industries 821,737 39,000 Sunkyong Industries Ltd Preferred 216,579 8,327 Sunkyong Ltd 112,716 70,700 Sunkyong Securities Preferred 13.11% (Non Voting) * 269,925
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Korea - continued 1,100 Taihan Textile Co Ltd * 138,717 58,810 Tong Kook Spinning Co Ltd * 306,178 59,060 Tong Yang Cement Corp Preferred 375,125 22,700 Tong Yang Investment & Financial Preferred 126,060 42,000 Tong Yang Securities Co Preferred * 160,352 ------------------ 123,131,398 ------------------ Malaysia - 7.7% 4,924,000 Amalgamated Steel Mills Berhad 4,362,787 243,666 Amsteel Corp Warrants Expires 5/19/00 * 159,958 60,000 Arab Malaysian Finance (Foreign Registered) 418,043 4,886,000 Berjaya Group 6,808,522 2,239,000 Berjaya Industrial Berhad 3,588,892 3,308,000 Berjaya Leisure Berhad 9,259,203 254,000 Berjaya Sports Toto 1,473,057 830,000 Cement Industries of Malaysia Berhad 2,523,762 788,000 Cold Storage 1,339,251 154,000 Edaran Otomobil Berhad 1,581,555 536,000 Esso Malaysia Berhad 1,478,695 3,445,000 Golden Hope Plantations Berhad 6,215,707 1,277,000 Highlands and Lowlands Berhad 2,283,480 463,000 Hong Leong Industries Berhad 1,584,978 3,185,000 IGB Corp Berhad 3,899,476 1,845,000 Kuala Lumpur Kepong Berhad 5,572,896 1,076,000 Kumpulan Emas Berhad * 1,131,035 2,444,000 Kumpulan Guthrie Berhad 4,252,147 1,952,000 Land & General Berhad 3,970,036 2,237,000 Landmark Berhad 4,018,131 614,000 Larut Consolidated Berhad 1,003,963 1,206,000 Lion Land Berhad 1,525,107 984,000 Malayan Cement Berhad 2,575,916 5,979,000 Malayan United Industries Berhad 5,466,101 1,416,600 Malaysia Mining Corp Berhad 1,962,587 1,215,000 Malaysian International Ship (Alien Market) 3,205,095 897,000 Malaysian Tobacco Co Berhad 1,401,675 879,000 MBF Capital Berhad 1,805,437 465,000 Metroplex Berhad 632,984 2,154,000 Metroplex Berhad Warrants 11/04/98 * 1,578,848 448,000 Nestle Malaysia 3,410,068 433,800 Nylex Berhad 1,048,248 2,333,000 Olympia Industries 2,621,454
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Malaysia - continued 46,200 Oriental Holdings Berhad 416,786 873,000 Perlis Plantations 2,707,249 6,000 Perusahaan Otomobil 39,629 799,000 Public Bank Berhad (Alien Market) 1,866,371 661,000 Rothmans of Pall Mall Malaysia Berhad 6,854,913 362,000 Shell Refinery Co 1,166,331 3,374,200 Sime Darby Berhad 12,773,854 1,258,100 Sime UEP Properties Berhad 3,394,793 3,222,000 TA Enterprise Berhad 5,112,638 108,000 Tanjong 452,356 277,000 Tenaga Nasional 1,327,547 926,000 Tractors Malaysia Holdings Berhad 1,939,267 133,600 UMW Holding Berhad Warrants 1/26/00 * 390,093 ------------------ 132,600,921 ------------------ Mexico - 12.5% 1,134,175 Alfa SA Class A 6,432,210 2,330,000 Altos Hornos De Mexico * 5,145,295 3,000,000 Camesa Class B * 1,550,816 167,000 Cementos Mexicanos (Cemex) Class A (Registered) 668,419 3,475,000 Cemex SA Class B 15,042,346 5,847,000 Cemex SA CPO 23,476,035 923,000 Ceramic International 1,632,911 430,273 Cintracpo (Cintra SA De) Class A * 349,833 3,028,480 Cydsa SA Class A 7,523,702 1,062,000 Dina (Consorcio Grupo Dina) 866,123 646,100 Empresas ICA Soc Controladora ADR 10,660,650 46,000 Empresas ICA Soc Controladora 757,817 83,000 Grupo Celanese Mexicana Class B 178,080 3,156,600 Grupo Financiero Banamex Class B 7,390,484 103,529 Grupo Financiero Banamex Class L 218,229 46,396,000 Grupo Financiero Bancomer SA Class B 18,046,123 328,963 Grupo Financiero Bancomer SA Class L 104,013 992,000 Grupo Financiero Invermexico Class B 84,637 60,400 Grupo Financiero Invermexico Class L * 4,774 700 Grupo Financiero Serfin SA de CV Class B * 281 14,233,320 Grupo Gigante SA Class B * 4,196,776 38,886 Grupo Mexico Class B Warrants 8/9/01 * 107,827 2,827,000 Grupo Mexico Class B * 9,293,275 280,200 Grupo Mexico Desarollo Class B ADR * 595,425 584,800 Grupo Mexico Desarollo Class L ADR * 1,608,200
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Mexico - continued 10,000 Grupo Posadas SA 144A * 90,339 924,000 Grupo Posadas SA Class L * 405,772 660,000 Grupo Simec SA Class B * 154,856 6,310,000 Grupo Situr SA de CV 308,770 1,438,200 Grupo Tribasa SA ADR * 9,887,625 74,000 Grupo Tribasa SA * 249,762 6,275,000 Herdez Class A 2,810,759 904,000 Hylsamex SA 3,913,174 1,832,000 Sears Roebuck de Mexico SA * 3,195,082 881,500 Telefonos de Mexico ADR Class L 34,268,313 39,000 Tolmex SA de Con Class B 168,821 333,000 Transportation Maritima Mexicana SA Class A 1,608,595 25,000 Transportation Maritima Mexicana SA Class L 150,565 1,383,600 Tubos de Acero de Mexico SA * 22,654,931 2,283,280 Vitro SA 6,331,303 1,615,400 Vitro SA ADR 13,327,050 ------------------ 215,459,998 ------------------ Pakistan - 0.7% 1,452,000 Fauji Fertilizer 2,861,983 349,910 Hub Power Co GDR * 8,529,056 910,000 Japan Power Generation Ltd * 249,751 436,000 Karachi Electric Supply * 190,370 53,700 Pakistan State Oil 417,355 627,000 Southern Electric Power Co * 233,092 ------------------ 12,481,607 ------------------ Peru - 0.3% 219,430 Banco Wiese 324,252 1,048,410 CNC Trabajo T Shares * 542,828 595,000 CPT Telefonica Del Peru B Shares 1,322,222 73,446 Credicorp Ltd 1,689,258 223,277 Enrique Ferreyos 206,738 77,813 Milpo Minera T Shares 529,340 217,732 Minsur Trabajo 777,614 ------------------ 5,392,252 ------------------ Philippines - 0.1% 1,470,000 JG Summit Holdings Inc Class B 413,117 7,000 Philippine Long Distance Telephone Sponsored ADR 406,000 28,500 Philippine National Bank 332,824 159,000 Sime Darby Pilipinas Inc 241,536 ------------------ 1,393,477 ------------------
14 See accompaying notes to the financial statements. GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Poland - 4.0% 106,490 Agros Holdings Class C * 2,872,180 2,308,000 Bank Inicjatyw Gospodarczych 3,470,904 17,540 Bank Przemyslowo Handlowy 1,186,995 116,685 Bank Rozwoju Eksportu SA 4,081,762 77,400 Bank Slaski SA 8,907,022 93,213 Budimex SA * 966,017 45,186 Debica Class A 1,344,294 96,000 Drosed * 2,479,404 759,640 Elektrim SA (Bearer) 7,698,718 91,800 Elektrobudowa SA 1,890,741 290,935 Exbud SA * 3,661,893 91,308 Gorazde Cement 2,716,434 13,290 Huta Szkla Irena 67,345 100,890 Jelfa * 2,275,863 84,060 Jutrzenka (Prezedsib Cukiernicze) 1,868,733 1,095,600 Mostostal Export (Bearer) 2,865,437 12,500 Mostostal Zabrze-Holding SA 76,010 47,150 Polfa Kunto Class A * 1,849,745 415,809 Polifarb Cieszyn (Bearer) 2,582,833 372,170 Polifarb Wroclaw 2,226,596 109,479 Rafako SA (Raciborska Fabryka) * 637,088 16,500 Relpol SA 474,696 166,150 Rolimpex SA 1,118,965 886,300 Sokolow * 1,564,672 181,779 Stomil-Olsztyn SA 2,436,556 513 Universal SA * 1,711 108,900 Vistula 395,184 670,724 Wielkopolski 5,547,704 14,145 Wolczanka SA 93,412 27,000 Zaklady Piwowarski (Bearer) 1,677,128 ------------------ 69,036,042 ------------------ Portugal - 2.5% 109,053 Banco Commercial Portugues (Registered) 1,565,517 338,940 Banco Espirito Santo e Commercial de Lisboa (Registered) 6,428,999 275,000 Banco Totta & Acores (Registered) 4,085,474 291,000 BPI Sgps SA (Registered) 4,328,316 15,400 Cel-Cat Fabrica Nacional de Condutores Electricos SA 239,128 97,900 Cimpor Cimentos De Portugal SA (Registered) 2,133,777 1,100 CIN (Corp Ind Norte) /Bearer/ 58,972 12,666 Cristais Alcobaca Preferred 285,015
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Portugal - continued 348,400 Empresa Fabril de Maquinas Electricas * 2,772,670 106,000 Engil Sociedade Gestora 1,193,249 15,900 Est Jeronimo Martins Filho Admin 857,472 44,500 Fisipe Fibra Sint * 262,135 177,000 Lisnave Navais De Lisboa * 443,126 71,900 Modelo Continente 2,520,058 364,600 Portucel Industrial Empresa 2,179,954 95,400 Portugal Telecom SA 3,346,530 35,400 Salvador Caetano Industrias 813,266 117,000 Semapa Society Investment 2,357,092 107,450 Soares Da Costa 1,009,559 16,200 Soja De Portugal Sociedada Gest 147,724 86,600 Somague * 849,370 29,000 Sonae Industria Sociedade * 257,952 155,000 Sonae Investimentos 4,925,012 155,000 Sonae Investimentos Rights 3/3/97 * 595,311 18,000 Uniao Cervjeira SA (Registered) 306,433 ------------------ 43,962,111 ------------------ Russia - 11.2% 35 Chernogorneft RDC 144A * 4,683,000 378,250 Gazprom ADR 144A * 6,581,550 672,700 Irkutskelectrosvyaz 975,415 580 Irkutskenergo 144A (Participating Certificates) 30,160,000 3,000,000 Irkutskenergo (Registered) 810,000 135,000 JSC Chernogorneft Sponsored ADR 1,806,300 10 Lenenergo RDC 144A * 850,000 2,500,000 Lenenergo * 2,200,000 160 Lukoil Holding RDC 144A * 11,904,000 501,900 Lukoil Holding RDC Preferred * 6,022,800 197,500 Lukoil Holding Sponsored ADR 11,751,250 1,050 Moscow City Telephone Network Preferred 945,000 146,800 Mosenergo AO Sponsored ADR 144A 6,092,200 415 Mosenergo RDC 144A * 5,768,500 10,000,000 New Century Holdings 12,833,000 999,745 Norilsk Nickel * 6,878,246 75,000 Norlisk Nickel Preferred * 356,250 250,000 Novgorodtelekom * 750,000 381 Rostelecom RDC 144A * 15,240,000 190,441 Rostelekom Preferred 2.5 * 571,323 3,546,965 Rostelekom * 13,939,572
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Russia - continued 1,500 Samara Svyazinform Preferred * 70,500 19,700 Seversky Tube Works ADR * 365,248 334,100 St Petersburg Telephone Preferred * 377,533 440,000 St Petersburg Telephone * 695,200 233,000 Surgutneftegaz ADR 9,553,000 39,111 Tatneft Sponsored ADR 144A * 2,894,214 49,350 Templeton Russia Fund Inc 1,647,056 24,500 Torgoviy Dom Gum Sp ADR * 1,372,000 140,500,000 Unified Energy System 32,034,000 17,200,000 Unified Energy Systems Preferred 3,259,400 ------------------ 193,386,557 ------------------ South Africa - 4.8% 247,681 AECI Ltd 1,237,990 212,457 Amalgamated Bank of South Africa 1,351,116 36,308 Anglo American Industrial Ltd 1,450,214 1,069,420 Avgold Ltd * 2,376,754 22,625,000 Consolidated Mining Corp * 5,755,327 368,000 De Beers Centenary Link Units 12,768,939 39,000 De Beers Consolidated Mines Ltd ADR 1,356,469 335,300 Del Monte Royal Foods Ltd 231,938 561,475 Driefontein Consolidated Ltd 6,420,974 215,992 Engen Ltd 1,296,482 71,617 Impala Platinum Holdings Ltd 998,787 626,072 JCI Ltd 6,810,445 1,973,100 Joel HJ Mining Co Ltd * 1,937,217 1,561,400 Oryx Gold Holdings Ltd * 2,188,016 78,637 Polifin Ltd 152,659 3,285 Randfontein Estates Goldmine 17,153 323,500 Randgold & Exploration Co * 2,725,008 571,628 Sappi Ltd 4,655,678 770,000 Sasol Ltd 8,333,147 9,097,896 South African Iron & Steel Industrial Corp Ltd 6,902,342 75,000 St Helena Gold Mines 485,329 466,000 Sun International Ltd 311,949 38,020 Vaal Reefs Exploration & Mining 2,892,964 449,151 Western Areas Gold Mining Co Ltd 6,213,848 110,437 Western Deep Levels 3,844,287 ------------------ 82,715,032 ------------------
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Sri Lanka - 0.2% 121,000 Aitken Spence & Co 210,435 3,672,576 Blue Diamonds Jewelry Ltd 654,677 46,500 Development Finance Corp 218,348 105,966 Hayleys Ltd 360,284 228,244 John Keells Holdings Ltd 754,198 291,900 Lanka Walltile Ltd 133,259 96,000 National Development Bank 334,748 ------------------ 2,665,949 ------------------ Taiwan - 6.8% 2,818,000 Ambassador Hotel 5,027,754 70 Asia Cement Corp GDR 144A 1,348 2,403,000 Cheng Loong Co * 1,842,416 3,445,000 Chia Hsin Flour * 2,416,007 3,750,000 Chia Hsin Livestock * 2,330,124 90,000 China General Plastics Corp 134,738 1,116,000 China Man-Made Fiber Co * 1,159,797 17,780,675 China Steel Corp 16,863,213 109,675 China Steel Corp GDR 144A 2,070,116 2,955,000 Chung Hwa Pulp Corp 2,931,377 5,314,000 Chung Shing Textile * 3,147,464 162,000 Dong Ho Textile Co Ltd * 164,826 601,407 Far East Department Store 917,845 2,189,000 Far East Textile Ltd 3,412,358 4,805,257 Feng An Metal Industrial Co Ltd 4,208,092 3,603,085 Formosa Chemicals and Fiber Co 5,813,117 3,194,000 Formosan Rubber Group * 5,779,840 427,000 Hegon 799,073 4,110,000 International Commercial Bank of China 12,694,404 1,748,000 Kao Hsing Chang Iron & Steel * 1,842,006 1,840,779 Laelae Enterprise Co Ltd * 1,719,041 660 Li Peng * 772 1,669,000 Macronix International Co * 2,880,723 18,471 President Enterprise GDR 144A * 369,420 613,330 Prince Housing Develop Corp * 624,028 310,300 R O C Taiwan Fund * 3,723,600 669,750 Shin Yih Ceramic Co Ltd * 975,908 369,000 Shin Yih Fiber * 406,275 1,370,000 Taipei Business Bank 3,634,084 2,029,000 Taiwan Pulp and Paper Co * 1,953,797 1,512,000 Taiwan Semiconductor * 3,433,866
18 See accompanying notes to the financial statements. GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Taiwan - continued 1,702,000 Taiwan Styrene Monomer Corp 2,418,176 921,000 Taiwan Synthetic Rubber 1,452,449 669,000 Tay Feng Tire Co Ltd * 1,701,672 9,246 Tuntex Distinct Corp GDR 144A * 68,420 73,750 Tuntex Distinct Corp GDS * 545,750 4,617,600 Tuntex Distinct 3,490,047 1,220,000 Universal Cement 1,130,451 5,656,000 Wan Yu Paper * 2,867,049 5,610,000 Yieh Loong Co * 4,056,650 4,315,000 Yue Loong Motor 6,162,046 724,500 Yuen Foong Yu Manufacturing 723,973 ------------------ 117,894,112 ------------------ Thailand - 2.1% 273,950 Asia Credit (Foreign Registered) 1,123,412 1,921,000 Bangchak Petro (Foreign Registered) 1,112,763 822,000 Bangkok Expressway Plc (Foreign Registered) * 888,820 74,800 Bangkok Insurance (Foreign Registered) 1,068,778 5,633,400 Bangkok Rubber Public Co Ltd (Foreign Registered) 1,696,873 746,200 Bank of Ayudhya Plc (Foreign Registered) 1,700,166 393,700 CP Feedmill Public Co Ltd (Foreign Registered) 1,064,260 1,568,400 First Bangkok City (Foreign Registered) 1,439,088 225,000 General Finance & Securities (Foreign Registered) 256,324 227,600 GFPT Public Co Ltd (Foreign Registered) * 36,915 1,324,850 International Broadcasting Plc (Foreign Registered) * 1,624,406 23,000 International Cosmetics Public Co Ltd (Foreign Registered) 91,485 1,100 Karat Sanitaryware Plc (Foreign Registered) 956 1,559,100 Krisda Mahanakorn Public Co Ltd (Foreign Registered) 1,189,119 172,000 Krung Thai Bank Public Co Ltd (Foreign Registered) 257,386 756,800 MDX Public Co Ltd (Foreign Registered) * 208,964 2,675,400 National Petrochemical (Foreign Registered) 2,737,907 350,000 Nava Finance & Securities (Foreign Registered) 398,185 1,862,500 NEP Realty and Industry Co Ltd (Foreign Registered) * 366,818 512,700 NTS Steel Group Pcl (Foreign Registered) * 142,554 5,985,750 Padaeng Industry Plc ( Foreign Registered) * 1,826,122 75,000 Pranda Jewelry (Foreign Registered) * 74,580 87,200 Prasit Development Public Co Ltd (Foreign Registered) 68,191 32,400 Saha Pathana International Holdings Plc (Foreign Registered) 76,924 70,000 Saha Pathanapibul (Foreign Registered) 171,736 2,511,300 Saha Union Public Co Ltd (Foreign Registered) 2,060,827 1,811,250 Siam City Bank (Foreign Registered) 1,486,351
See accompanying notes to the financial statements. 19 GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Thailand - continued 513,000 Siam Pulp & Paper (Foreign Registered) 916,050 201,512 Singer Thailand Plc (Foreign Registered) 809,316 3,108,050 Star Block Co Ltd (Foreign Registered) 168,035 24,000 Swedish Motor (Foreign Registered) 29,352 21,000 Tanayong (Foreign Registered) 14,597 1,581,150 Thai German Ceramics Industry (Foreign Registered) * 1,618,091 703,000 Thai Military Bank (Foreign Registered) 1,099,498 6,947,400 Thai Petrochemical (Foreign Registered) 6,975,571 112,700 Thai Plastic & Chemical (Foreign Registered) 398,226 378,600 Thai Telephone & Telecommunications (Foreign Registered) * 399,873 303,900 Union Asia Finance (Foreign Registered) 395,850 793,000 Univest Land Public (Foreign Registered) * 88,809 ------------------ 36,083,178 ------------------ Turkey - 2.1% 10,000,000 Akal Tekstil 1,159,149 63,700,000 Aksigorta SA 3,316,224 12,912,000 Alcatel Teletas Telekomunikasyon 1,654,240 26,713,000 Eczacibasi Ilac * 1,803,538 47,323,000 Eregli Demir ve Celik Fabrikalari 8,180,044 43,000,000 Global Menkul Degerler 856,957 2,519,000 Goodyear Lastikleri 1,680,221 46,100,000 Izmir Demir Celik * 787,489 17,519,000 Mardin Cimento 969,042 7,784,000 Netas Telekomunik 2,279,448 4,015,000 Petkim 1,959,572 4,257,000 Petrol Ofisi 1,904,543 5,124,000 Raks Elektronik SA 1,563,021 29,000,000 Tofas Otomobil Fab 2,005,125 8,800,000 Tupras Turkiye Petrol * 4,509,700 288,000 Usas Ucak Servisi A.S. 796,518 ------------------ 35,424,831 ------------------ United Kingdom - 0.0% 6,975 Lonrho 16,387 ------------------ Venezuela - 0.7% 522,874 Banco Provincial 948,450 564,370 Ceramica Carabobo Class A ADR 406,346 1,987,332 Ceramica Carabobo Class B ADR 1,391,132 1,079,166 Electricidad De Caracas 1,185,761 301,560 Mantex SAICA ADR 1,206,240
See accompanying notes to the financial statements. 20 GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------------- Venezuela - continued 1,203,000 Siderurgica Venezolana ADR 3,909,750 349,950 Siderurgica Venezolana Sivensa Class A 116,741 109,363 Siderurgica Venezolana Sivensa Registered ADR B 328,089 3,182 Siderurgica Venezolana Sivensa Registered ADR B 9,546 130,796 Venezolana de Cementos 376,334 2,333 Venezolana de Prerreducidos Caroni GDS 10,848 1,159,454 Venezolano de Pulpa y Papel GDS 144A 2,179,774 ------------------ 12,069,011 ------------------ TOTAL STOCK AND EQUIVALENTS (Cost $1,524,597,126) 1,663,905,727 ------------------ CONVERTIBLE BONDS - 1.2% India - 0.1% $ 2,292,000 Mahindra & Mahindra CV 144A, 5.00% due 7/9/01 2,486,820 ------------------ Korea - 0.0% $ 108,350 Hanbo Steel & General Construction Convertible, 3.375% due 01/31/99 * 391,105 ------------------ Malaysia - 0.2% $ 3,648,500 Berjaya Group Berhad Convertible, 6.00% due 09/30/01 * 2,674,293 ------------------ Portugal - 0.1% $ 38,000 Banco Commercial Portugues Class A Convertible, 8.00% due 07/02/98 2,156,500 ------------------ South Africa - 0.1% $ 1,100,000 Rangold Finance Convertible, 7.00% due 10/03/01 1,215,500 ------------------ Thailand - 0.6% $ 3,030,000 Bangkok Bank Public Co Convertible, 3.25% due 3/3/04 2,590,650 CHF 2,000,000 Bangkok Land Ltd Convertible, 3.125% due 3/31/01 542,373 $ 2,726,000 Bangkok Land Ltd Convertible, 4.50% due 10/13/03 1,553,820 $ 2,690,000 MDX Public Co Ltd Convertible, 4.75% due 9/17/03 * 941,500 $ 2,800,000 NTS Steel Group Convertible, 3.50% due 7/26/05 683,390 $ 534,000 NTS Steel Group Convertible, 4.00% due 12/16/08 149,520 $ 2,724,000 Sahaviriya Steel Convertible, 3.50% due 7/26/05 1,716,120 $ 630,000 Somprasong Land Co Convertible, 3.88% due 1/21/04 * 63,000 $ 2,445,000 Tanayong Public Co Convertible, 3.50% due 3/1/04 * 2,078,250 ------------------ 10,318,623 ------------------ Venezuela - 0.1% $ 1,460,000 Global Investment Financial Corp, 11.00% due 3/19/01 1,489,200 ------------------ TOTAL CONVERTIBLE BONDS (Cost $21,740,749) 20,732,041 ------------------ SHORT-TERM INVESTMENTS - 2.0% Cash Equivalents - 0.8% $ 14,300,000 First National Bank of Chicago Time Deposit, 5.44% due 3/3/97 14,300,000 ------------------
See accompanying notes to the financial statements. 21 GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Par Value Description Value ($) - -------------------------------------------------------------------------------------------------------------------- U.S. Government - 1.2% $ 21,300,000 U.S. Treasury Bill, 5.56% due 1/8/98 20,326,596 ------------------ TOTAL SHORT-TERM INVESTMENTS (Cost $34,637,711) 34,626,596 ------------------ TOTAL INVESTMENTS - 99.5% (Cost $1,580,975,586) * * 1,719,264,364 Other Assets and Liabilities (net) - 0.5% 8,134,627 ------------------ TOTAL NET ASSETS - 100.0% $ 1,727,398,991 ================== Notes to the Schedule of Investments: ADR American Depositary Receipt CHF Swiss Francs GDR Global Depository Receipt GDS Global Depository Shares RDC Russian Depository Certificate (a) Valued by management (Note 1). (b) Bankrupt security. 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. A dividend has not been declared for the year ended February 28, 1997. ** The aggregate identified cost for federal income tax purposes is $1,582,450,991, resulting in gross unrealized appreciation and depreciation of $322,943,850 and $186,130,477, respectively, and net unrealized appreciation of $136,813,373.
See accompanying notes to the financial statements. 22 GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997 - -------------------------------------------------------------------------------- At February 28, 1997, industry sector diversification of the Fund's equity investments was as follows: Industry Sector (Unaudited) Metals and Mining 12.7% Oil and Gas 10.2 Banking 9.7 Construction 9.0 Utilities 8.2 Conglomerates 7.0 Telecommunications 6.6 Textiles 4.9 Consumer Goods 3.3 Chemicals 3.2 Electronic Equipment 2.8 Machinery 2.5 Real Estate 2.3 Automotive 2.1 Financial Services 2.0 Food and Beverage 1.7 Paper and Allied Products 1.6 Services 1.5 Transportation 1.2 Health Care 0.5 Retail Trade 0.4 Insurance 0.2 Communications 0.1 Miscellaneous 6.3 ========= 100.0% =========
See accompanying notes to the financial statements. 23 GMO Emerging Markets Fund (A Series of GMO Trust) Statement of Assets and Liabilities - February 28, 1997 - -------------------------------------------------------------------------------- Assets: Investments, at value (cost $1,580,975,586) (Note 1) $ 1,719,264,364 Foreign currency, at value (cost $9,277,761) (Note 1) 9,282,242 Cash 524,465 Receivable for investments sold 10,650,268 Receivable for Fund shares sold 500,000 Dividends and interest receivable 4,133,696 Receivable for open forward foreign currency contracts (Note 5) 5,843,045 Foreign withholding taxes receivable 7,868 Receivable for open swap contracts (Notes 1 and 5) 2,385,940 Receivable for expenses waived or borne by Manager (Note 2) 292,844 --------------------- Total assets 1,752,884,732 --------------------- Liabilities: Payable for investments purchased 21,138,838 Payable for Fund shares repurchased 2,000,000 Payable to affiliate for (Note 2): Management fee 1,287,665 Shareholder service fee 193,289 Accrued expenses 865,949 --------------------- Total liabilities 25,485,741 --------------------- Net assets $ 1,727,398,991 ===================== Net assets consist of: Paid-in capital $ 1,552,555,011 Accumulated undistributed net investment income 11,553,963 Accumulated net realized gain 16,823,333 Net unrealized appreciation 146,466,684 --------------------- $ 1,727,398,991 ===================== Net assets attributable to: Class I Shares $ 1,747,646 ===================== Class III Shares $ 1,725,651,345 ===================== Shares outstanding: Class I 140,068 ===================== Class III 138,115,145 ===================== Net asset value per share: Class I $ 12.48 ===================== Class III $ 12.49 =====================
24 See accompanying notes to the financial statements. GMO Emerging Markets Fund (A Series of GMO Trust) Statement of Operations - Year Ended February 28, 1997 - -------------------------------------------------------------------------------- Investment income: Dividends (net of foreign tax expense of $3,098,161) $ 27,560,550 Interest 5,508,128 ---------------- Total income 33,068,678 ---------------- Expenses: Management fee (Note 2) 12,541,622 Custodian fees 2,511,925 Stamp duties and transfer taxes 806,086 Registration fees 121,535 Audit fees 74,811 Legal fees 67,221 Transfer agent fees 39,627 Trustees fee (Note 2) 5,960 Miscellaneous 80,956 Fees waived or borne by Manager (Note 2) (2,222,584) ---------------- 14,027,159 Shareholder service fee (Note 2) Class I 675 Class II 12,187 Class III 1,478,774 ---------------- Net expenses 15,518,795 ---------------- Net investment income 17,549,883 ---------------- Realized and unrealized gain (loss): Net realized gain (loss) on: Investments 37,264,275 Closed swap contracts 8,933,765 Foreign currency, forward contracts and foreign currency related transactions 1,052,655 ---------------- Net realized gain 47,250,695 ---------------- Change in net unrealized appreciation (depreciation) on: Investments 166,939,087 Open swap contracts 751,406 Foreign currency, forward contracts and foreign currency related transactions 6,086,084 ---------------- Net unrealized gain 173,776,577 ---------------- Net realized and unrealized gain 221,027,272 ---------------- Net increase in net assets resulting from operations $ 238,577,155 ================
See accompanying notes to the financial statements. 25 GMO Emerging Markets Fund (A Series of GMO Trust)
Statement of Changes in Net Assets - ---------------------------------------------------------------------------------------------------------------------------------- Year Ended February 28, 1997 February 29, 1996 ----------------------------- ------------------------------ Increase (decrease) in net assets: Operations: Net investment income $ 17,549,883 $ 7,811,918 Net realized gain (loss) 47,250,695 (25,051,517) Change in net unrealized appreciation (depreciation) 173,776,577 66,409,381 ----------------- ---------------- Net increase in net assets resulting from operations 238,577,155 49,169,782 ----------------- ---------------- Distributions to shareholders from: Net investment income Class I - - Class II (178,659) - Class III (15,814,130) (615,855) ----------------- ---------------- Total distributions from net investment income (15,992,789) (615,855) ----------------- ---------------- Net realized gains Class III - (7,081,456) ----------------- ---------------- Total distributions from net realized gains - (7,081,456) ----------------- ---------------- (15,992,789) (7,697,311) ----------------- ---------------- Net share transactions: (Note 5) Class I 1,542,386 - Class II (2,994,394) - Class III 599,087,113 481,448,287 ----------------- ---------------- Increase in net assets resulting from net share transactions 597,635,105 481,448,287 ----------------- ---------------- Total increase in net assets 820,219,471 522,920,758 Net assets: Beginning of period 907,179,520 384,258,762 ----------------- ---------------- End of period (including accumulated undistributed net investment income of $11,553,963 and $7,846,974, respectively) $ 1,727,398,991 $ 907,179,520 ================= ================
26 See accompanying notes to the financial statements.
GMO Emerging Markets Fund (A Series of GMO Trust) Financial Highlights (For a Class I share outstanding throughout the period) - ---------------------------------------------------------------------------------------------------------------------------------- Period from January 2, 1997 (commencement of operations) to February 28, 1997 -------------------- Net asset value, beginning of period $ 10.86 -------------------- Income (loss) from investment operations: Net investment income 0.01 Net realized and unrealized gain (loss) 1.61 -------------------- Total from investment operations 1.62 -------------------- Net asset value, end of period $ 12.48 ==================== Total Return (a) 14.92% Ratios/Supplemental Data: Net assets, end of period (000's) $ 1,748 Net expenses to average daily net assets 1.45% *(C) Net investment income to average daily net assets 0.77% * Portfolio turnover rate 41% Average broker commission rate per equity share (d) $ 0.0004 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: (b)
* Annualized (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 $0.01 per share. (c) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .20% of average daily net assets. (d) The average broker commission rate will vary depending on the markets in which trades are executed. See accompanying notes to the financial statements. 27 GMO Emerging Markets Fund (A Series of GMO Trust) Financial Highlights (For a Class II share outstanding throughout the period) - -------------------------------------------------------------------------------
Period from November 29, 1996 (commencement of operations) to February 4, 1997(e) --------------- Net asset value, beginning of period $ 10.77 -------------- Income (loss) from investment operations: Net investment income 0.05 Net realized and unrealized gain (loss) on investments 1.07 -------------- Total from investment operations 1.12 -------------- Less distributions to shareholders: From net investment income (0.07) -------------- Net asset value, end of period $ 11.82 ============== Total Return (a) 10.42% Ratios/Supplemental Data: Net assets, end of period (000's) $ - Net expenses to average daily net assets 1.33%*(b) Net investment income to average daily net assets 6.14%* Portfolio turnover rate 41% Average broker commission rate (d) $ 0.0004 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: (c)
* Annualized (a) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the period shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .07% of average daily net assets. (c) Fees and expenses voluntarily waived or borne by the Manager were less than $.01 per share. (d) The average broker commission rate will vary depending on the markets in which trades are executed. (e) All Class II shares of the Fund were exchanged for Class III shares on February 4, 1997. 28 See accompanying notes to the financial statements. 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 ------------------------------------------------------------------- 1997 1996 1995 1994* --------------- ------------- --------------- ------------- Net asset value, beginning of period $ 10.54 $ 9.52 $ 12.13 $ 10.00 --------------- ------------- -------------- ------------- Income (loss) from investment operations: Net investment income 0.13 0.10 0.05 0.02 Net realized and unrealized gain (loss) 1.96 1.06 (2.37) 2.11 --------------- ------------- -------------- ------------- Total from investment operations 2.09 1.16 (2.32) 2.13 --------------- ------------- -------------- ------------- Less distributions to shareholders from: Net investment income (0.14) (0.01) (0.07) (0.00)(c) Net realized gains - (0.13) (0.22) - --------------- ------------- -------------- ------------- Total distributions (0.14) (0.14) (0.29) (0.00) --------------- ------------- -------------- ------------- Net asset value, end of period $ 12.49 $ 10.54 $ 9.52 $ 12.13 =============== ============= ============== ============= Total Return (a) 19.98% 12.24% (19.51%) 21.35% Ratios/Supplemental Data: Net assets, end of period (000's) $ 1,725,651 $ 907,180 $ 384,259 $ 114,409 Net expenses to average daily net assets 1.24% (e) 1.35% 1.58% 1.64%** Net investment income to average daily net assets 1.40% 1.31% 0.85% 0.87%** Portfolio turnover rate 41% 35% 50% 2% Average broker commission rate per equity share (b) $ 0.0004 N/A N/A N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.02 (d) - (d)
* Period from December 9, 1993 (commencement of operations) to February 28, 1994. ** 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) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. The average broker commission rate will vary depending on the markets in which trades are executed. (c) The per share income distribution was $ 0.004. (d) Fees and expenses voluntarily waived or borne by the Manager were less than $.01 per share. (e) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .06% of average daily net assets. See accompanying notes to the financial statements. 29 GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1997 - -------------------------------------------------------------------------------- 1. Significant accounting policies The 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 into classes. The Fund seeks long-term capital appreciation consistent with a prudent level of risk through investment in equity and equity-related securities traded in the securities markets of newly industrializing countries in Asia, Latin America, the Middle East, Southern Europe, Eastern Europe and Africa. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. Class II shares are not currently active. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 30 GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements - Continued - -------------------------------------------------------------------------------- Certain investments in 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. 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 net exchange gains and losses on disposition of foreign currencies, 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. When a forward currency contract is extinguished through delivery or offset by entering into another forward currency contract, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it was extinguished or offset. 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 5, and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 28, 1997. 31 GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return based on a notional amount. 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, 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 is 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 5 for a summary of all open swap agreements as of February 28, 1997. Options The Fund may write call and put options on securities it owns or in which it may invest. 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 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 securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price 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. As of February 28, 1997, there were no outstanding written options. The Fund may also purchase put and call options. 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. The risk associated with purchasing put and call options is limited to the premium paid. 32 GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to the differing treatments for foreign currency, swap, and passive foreign investment company transactions. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments. Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ------------------- -------------------------- ------------------- $2,149,895 ($2,149,895) - 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. 33 GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements-continued - -------------------------------------------------------------------------------- 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 in such manner as deemed equitable by the Trustees, 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 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. Effective June 1, 1996, the Manager will reduce such premium or fee only when any portion of a purchase is offset by a corresponding redemption occurring on the same day. All purchase premiums and redemption fees are paid to and recorded as paid-in capital by the Fund. For the year ended February 28, 1997, the Fund received $9,898,522 in purchase premiums and $21,110 in redemption fees. There is no premium for reinvested distributions. 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. 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 1.00% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares and .15% for Class III shares. 34 GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .81% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding 1.20%. 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 28, 1997, was $5,960. 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 28, 1997, aggregated $1,111,588,722 and $481,971,648, respectively. 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:
Period from January 2, 1997 (commencement of operations) to February 28, 1997 ------------------------------- Class I: Shares Amount ---------- ---------- Shares sold 140,068 $1,542,386 Shares issued to shareholders in reinvestment of distributions - - Shares repurchased - - ---------- ---------- Net increase 140,068 $1,542,386 ========== ==========
35 GMO Emerging Markets Funds (A Series of GMO Trust) Notes to Financial Statements - continued - --------------------------------------------------------------------------------
Period from November 29, 1996 (commencement of operations) to February 28, 1997 ---------------------------------- Class II: Shares Amount -------------- -------------- Shares sold 5,586,262 $ 63,054,064 Shares issued to shareholders in reinvestment of distributions 16,729 178,659 Shares repurchased (5,602,991) (66,227,117) -------------- -------------- Net decrease - $ (2,994,394) ============== ============== Year Ended Year Ended February 28, 1997 February 29, 1996 ----------------------------- ----------------------------- Class III: Shares Amount Shares Amount ------------ ------------- ------------ ------------- Shares sold 54,549,584 $ 626,535,006 47,019,289 $ 494,501,573 Shares issued to shareholders in reinvestment of distributions 759,519 8,422,271 684,670 7,137,961 Shares repurchased (3,248,382) (35,870,164) (2,004,988) (20,191,247) ------------ ------------- ------------ ------------- Net increase 52,060,721 $ 599,087,113 45,698,971 $ 481,448,287 ============ ============= ============ =============
36 GMO Emerging Markets Funds (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 5. Financial instruments A summary of outstanding financial instruments at February 28, 1997 is as follows: Forward currency contract
Settlement Units of Net Unrealized Date Deliver/Receive Currency Value Appreciation ---------- --------------- ------------ ------------ -------------- Sales 04/07/97 DEM 82,105,000 $ 48,748,045 $ 5,843,045 =============
Swap agreements
Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ---------- ---------- ----------------------------------------------- -------------- $ 3,029,260 03/06/97 Agreement with Barclays Bank PLC dated $ 665,495 March 7, 1996 to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread and to receive (pay) the notional amount multiplied by the return on the Taiwan Weighted Index. 3,352,444 03/11/97 Agreement with Barclays Bank PLC dated 724,102 March 12, 1996 to pay the notional amount multiplied by 6 month LIBOR adjusted by a specified spread and to receive (pay) the notional amount multiplied by the return on the Taiwan Weighted Index.
37 GMO Emerging Markets Funds (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Swap agreements - continued
Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------ ---------- ------------------------------------------- -------------- $ 6,567,991 03/18/97 Agreement with Barclays Bank PLC dated $ 1,133,728 March 19, 1996 to pay the notional amount multiplied by 6 month LIBOR adjusted by a specified spread and to receive (pay) the notional amount multiplied by the return on the Taiwan Weighted Index. 5,936,852 04/28/97 Agreement with Robert Fleming & Co. Limited (710,483) dated April 26, 1996 to pay the notional amount multiplied by a fixed rate and to receive (pay) the notional amount multiplied by the return on a basket of selected Indian securities (including dividends). 10,000,002 01/09/98 Agreement with Union Bank of Switzerland 585,765 dated January 14, 1997 to receive (pay) the notional amount multiplied by the change in market value (including dividends) of Telecomunicacoes Brasileiras ("Telebras") Ordinary Shares and to pay (receive) the notional amount multiplied by the change in market value (including dividends) of Telecomunicacoes Brasileiras ("Telebras") ADR adjusted by a specified amount. 1,600,053 01/16/98 Agreement with Robert Fleming & Co. Limited (12,667) dated January 24, 1997 to receive (pay) the notional amount multiplied by the change in market value of State Bank of India common stock and to pay the notional amount multiplied by a fixed rate. -------------- Net unrealized appreciation $ 2,385,940 ==============
38 GMO Emerging Markets Funds (A Series of GMO Trust) Federal Income Tax Information on Distributions - (Unaudited) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all the Fund's distributions are from investment company taxable income. 39 GMO Emerging Markets 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 the sub-custodian of the Fund. GMO has an exclusive consulting agreement with Dancing Elephant Ltd. Management Discussion and Analysis of Fund Performance - ------------------------------------------------------ The Class III shares of the GMO Emerging Markets Fund returned 20% for the fiscal year ended February 28, 1997. The Fund's benchmark, the IFC Investable Index, returned 15% during the same period. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in equity securities throughout the period. Most of the outperformance during the year resulted from the positive impact of the Fund's country bets. During the year, the Fund held overweight positions in Eastern Europe, Russia and Taiwan, which all outperformed the benchmark and was underweight in South Africa, which underperformed the benchmark. Eastern Europe was the best performing region in the world, as improving fundamentals and cheap valuations resulted in strong liquidity inflows into the region. Falling interest rates and the re-election of Mr. Yelstin resulted in very strong performance by the Russian market. Taiwan also had a very strong year, following resolution of tensions with the mainland after the Presidential election. Overweight positions in Korea and India negatively impacted relative performance. The Korean market declined by 40% in dollar terms, plagued by rising trade deficits, falling petrochemical and DRAM (dynamic random access memory) prices and labor unrest. Stock selection was largely neutral for the year. The Fund's holdings of South African gold stocks, neglected Taiwanese stocks and Indonesian stocks added value. Outlook We are bluish on the emerging equity markets as an asset class. The emerging markets have strongly underperformed the developed markets during the last three years and valuations relative to developed markets are at levels not seen since 1992. We believe that buoyancy of the U.S. market has resulted in the neglect of emerging markets as an asset class. A sideways-to-slowly-declining U.S. market (coupled with a benign interest rate environment) would represent the best case scenario for emerging equities. A rapid decline in the U.S. market would likely cause a similar decline emerging markets in the short term. The Fund is overweight Russia, even following the market's tremendous rally last year. For the first time since the collapse of the Soviet Union, economic growth has been positive thus far in 1997. We believe that the risk of investing in Russia has been reduced with the recent appointment of a pro-reform economic team and the improved health of Mr. Yelstin. Assets are still substantially undervalued, and we believe valuations will converge to emerging market levels in the coming years. We have been gradually increasing our weights in the regional telecom and engineering sectors, which are more geared towards improvements in the domestic economy. We continue to be positive on the economic prospects in Eastern Europe but have been reducing our bets following the region's strong performance during the past 12 months. In Asia, we are underweight in three expensive markets: Malaysia, Indonesia and the Philippines. Although India has had a strong bounce from its lows in December, it is still extremely attractive. The recent budget has de-policticized economic reform and should spur the economy from a cyclical downturn. Following the poor performance of the Korean market over the last two years, we believe the attractive valuation favors a continued overweighting in the portfolio. In Latin America, the Fund is overweight in Argentina and Mexico and slightly underweight in Brazil, Structural reform in Brazil has made it one of the best performing markets during the last three years. Although the Fund is underweight in Brazil, we continue to hold utility stocks, which we expect will benefit from the upcoming privatization of the power sector. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co LLC Management. They are not meant as investment advise. Comparison of Change in Value of a $10,000 Investment in GMO Emerging Markets Fund Class III shares and the IFC Investable Index As of February 28, 1997
Average Annual Total Return Since 1 Year 5 Year Inception 12/9/93 Class III 17.6% n/a 8.2% 1/2/97 Class I n/a n/a 12.6%
[LINE GRAPH APPEARS HERE]
Date GMO Emerging Markets Fund IFC Investable Index 12/09/93 9,840 10,000 02/28/94 11,941 10,893 02/28/95 9,612 8,364 02/29/96 (10,746) 9,499 02/28/97 12,893 11,006
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of fund investments will fluctuate, so that a investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower has certain expenses not been waived during the periods shown and do not include the effect of taxes on reinvested distributions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period, and reflects a transaction fee of 160 bp on the purchase and 40 bp on the redemption. Transaction fees are paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since the inception. Performance for Class I shares may be different due to higher shareholder service fees. Class II shares are not currently active. Past performance is not indicative of future performance. Information is unaudited. GMO Emerging Country Debt Fund (A Series of GMO Trust) Annual Report February 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 22, 1997 GMO Emerging Country Debt Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Par Value Description Value ($) - ---------------------------------------------------------------------------------------------------------------- Mexico - 9.3% FRF 360,250,000 Mexico Par Bond, 6.63% due 12/31/19 51,533,841 -------------- Nigeria - 1.8% USD 14,500,000 Central Bank of Nigeria Par Bond, Variable Rate, Step up (6.25%), due 11/15/20 9,823,750 -------------- Panama - 2.0% USD 8,118,000 Panama Interest Reduction Bond, Variable Rate, Step up (3.50%), due 7/17/14 6,047,910 USD 6,134,515 Panama PDI Capitalization Bond, PIK, Variable Rate, 6 mo. LIBOR - .81% (6.56%), due 7/17/16 5,183,665 -------------- 11,231,575 -------------- Poland - 1.4% USD 8,000,000 Poland Discount Bond (Registered), Variable Rate, 6 mo. LIBOR - .81% (6.50%), due 10/27/24 7,775,000 -------------- United States - 0.4% Structured Notes - 0.4% USD 2,000,000 Bankers Trust Medium Term Note, 17.10% due 10/14/97 (b) 2,271,000 -------------- Venezuela - 6.4% USD 17,000,000 Republic of Venezuela DCB, Variable Rate, 6 mo. LIBOR + .88% (6.50%), due 12/18/08 14,843,125 USD 378,000 Republic of Venezuela FLIRB Series B Odd Lot, Variable Rate, 6 mo. LIBOR + .88% (6.44%), due 3/31/07 340,200 USD 21,265,500 Republic of Venezuela New Money Bond Series A, Variable Rate, 6 mo. LIBOR + 1 (6.63%), due 12/18/05 18,713,640 USD 2,062,500 Republic of Venezuela New Money Bond Series B Odd Lot, Variable Rate, 6 mo. LIBOR + .88% (6.50%), due 12/18/05 1,815,000 -------------- 35,711,965 -------------- TOTAL DEBT OBLIGATIONS (Cost $210,655,837) 277,242,928 -------------- LOAN ASSIGNMENTS - 2.6% Congo - 1.1% ECU 3,414,900 Congo Loan Agreement (Direct Assignment with F.H. International)* 1,138,374 FRF 102,482,960 Congo Loan Agreement (Direct Assignment with F.H. International, Salomon, and Bank of America)* 5,216,516 -------------- 6,354,890 -------------- Peru - 1.1% USD 5,000,000 Peru Banco Central Stand-by Credit Agreement (Direct Assignment with J. P. Morgan)* 6,100,000 --------------
2 See accompanying notes to the financial statements. GMO Emerging Country Debt Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Par Value Description Value ($) - ---------------------------------------------------------------------------------------------------------------- Russia - 0.4% DEM 5,200,000 Russia Vnesheconombank Note Purchase Agreement (Direct Assignment with German Hermes Club)* 2,029,084 -------------- TOTAL LOAN ASSIGNMENTS (Cost $9,109,547) 14,483,974 -------------- LOAN PARTICIPATIONS - 34.1% Algeria - 3.2% JPY 217,500,000 Algeria Tranche 1, Japanese LIBOR + 13/16 (2.06%)(Participation with Bank of America) 1,288,528 USD 2,000,000 Algeria Tranche 2, LIBOR + 13/16 (6.63%)(Participation with Salomon) 1,600,000 FRF 50,564,324 Algeria Tranche 3 Loan, PIBOR + 13/16 (5.00%) (Participation with Salomon and Union De Banques Arabes Et Francaises) 5,901,967 USD 5,845,284 Algeria Tranche 3, 6.63%, (Participation with Salomon) 4,150,153 FRF 40,000,000 Algeria Unrestructured Loan, 5.00% (Participation with Salomon) 4,668,878 -------------- 17,609,526 -------------- Cameroon - 0.6% NLG 28,052,902 Cameroon Loan Agreement (Participation with Bank of America and Salomon)* 3,250,284 -------------- Congo - 0.2% USD 4,179,127 Republic of Congo Loan (Participation with F.H. International)* 1,211,947 -------------- Ivory Coast - 6.0% USD 3,656,573 Ivory Coast Credit Agreement (Participation with J. P. Morgan)* 1,417,109 FRF 378,297,436 Ivory Coast Credit Agreement (Participation with Banque Paribas, J.P. Morgan, Bank of America, Chase Manhattan and Salomon)* 28,551,752 DEM 361,735 Ivory Coast Credit Agreement (Participation with Salomon)* 79,281 FRF 1,150,000 Ivory Coast Credit Agreement (Participation with Salomon)* 86,795 SDR 2,974,383 Ivory Coast Credit Agreement (Participation with Salomon)* 1,524,113 BEF 18,333,554 Ivory Coast Refinancing Agreement (Participation with Salomon)* 194,780 JPY 428,291,342 Ivory Coast Refinancing Agreement (Participation with J. P. Morgan)* 1,313,015 -------------- 33,166,845 -------------- Jamaica - 0.9% USD 6,000,000 Jamaica Refinancing Agreement Tranche B, LIBOR + 13/16 (6.31%) Participation with Salomon and Chase Manhattan Bank) 5,100,000 -------------- Morocco - 3.8% JPY 384,300,844 Morocco Restructuring and Consolidating Agreement Tranche A, Japanese Long Term Fixed Prime + .2175% (3.02%)(Participation with J. P. Morgan) 2,419,990 JPY 2,971,603,837 Morocco Restructuring and Consolidating Agreement Tranche A, Japanese Long Term Floating Prime + .1175% (2.82%)(Participation with Bankers Trust Co. and J.P. Morgan) 18,712,561 -------------- 21,132,551 --------------
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 28, 1997
Par Value Description Value ($) - ---------------------------------------------------------------------------------------------------------------- Russia - 18.5% USD 2,500,000 International Bank for Economic Cooperation (Comecon Countries) Loan Agreement (Participation with Bank of America)* 1,212,500 DEM 10,000,000 International Investment Bank Loan Agreement (Participation with Bank of America)* 3,169,056 JPY 900,000,000 International Investment Bank Loan Agreement (Participation with Bank of America)* 3,243,848 USD 32,000,000 International Investment Bank Loan Agreement (Participation with Bank of America and Salomon)* 17,120,000 DEM 3,705,533 Russia Vnesheconombank Loan Agreement (Participation with Chase Manhattan Bank)* 1,928,822 FRF 348,120,994 Russia Vnesheconombank Loan Agreement (Participation with Banque Paribas, Chase Manhattan, Bank of America, Lehman Brothers and J. P. Morgan)* 53,388,573 ECU 2,550,000 Russia Vnesheconombank Loan Agreement (Participation with Bank of America)* 2,561,158 GBP 8,311,366 Russia Vnesheconombank Loan Agreement (Participation with Chase Manhattan Bank and Bank of America)* 11,848,045 NLG 2,165,880 Russia Vnesheconombank Loan Agreement (Participation with J. P. Morgan)* 996,649 ECU 3,000,000 Russia Vnesheconombank Note Purchase Agreement (Participation with Bank of America)* 3,013,127 ECU 5,000,000 Russia Vnesheconombank Note Purchase Agreement (Participation with J. P. Morgan)* (c) 4,322,752 -------------- 102,804,530 -------------- Yugoslavia - 0.9% USD 2,488,674 Yugoslavia Loan Participation Note Tranche A (Participation with Chase Manhattan Bank)* 1,368,771 USD 3,711,287 Yugoslavia Loan Participation Note Tranche B (Participation with Chase Manhattan Bank)* 2,041,208 USD 3,266,190 Yugoslavia Loan Participation Note Tranche C (Participation with Chase Manhattan Bank and J. P. Morgan)* 1,796,405 -------------- 5,206,384 -------------- TOTAL LOAN PARTICIPATIONS (Cost $110,382,000) 189,482,067 -------------- Principal Amount PUT OPTIONS PURCHASED - 0.2% (000's omitted) Options on Bonds - 0.0% USD 15,000 Brazil EI Brady Bond, Expires 4/11/97 Strike 85.0625 7,815 USD 15,000 Brazil Real Commercial, Expires 3/3/97 Strike 1.053 0 USD 10,000 Venezuela Discount Bond, Expires 7/10/97 Strike 88.25 less DCB offer 32,900 -------------- 40,715 -------------- Options on Currency - 0.2% USD 20,000 Thai Baht, Expires 8/29/97 Strike 26.10 498,000 -------------- TOTAL PUT OPTIONS PURCHASED (Cost $552,500) 538,715 --------------
4 See accompanying notes to the financial statements. GMO Emerging Country Debt Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Description Value ($) - ---------------------------------------------------------------------------------------------------------------- Principal Amount CALL OPTIONS PURCHASED - 3.7% (000's omitted) Options on Bonds - 3.7% USD 50,000 Argentina Discount Bond, Expires 6/6/97 Knock Out 75.00, Strike 75.00 3,840,000 USD 48,000 Brazil Discount Z, Expires 4/25/97 Strike 73.00 4,260,000 USD 30,000 Brazil Discount Z, Expires 5/30/97 Strike 77.00 1,485,210 USD 75,000 Brazil Par Bond, Expires 5/2/97 Knock Out 57.00, Strike 57.00 5,851,500 USD 50,000 Mexico Discount Bond, Expires 5/23/97 Strike 87.00 1,987,100 USD 50,000 Venezuela Par Bond, Expires 5/16/97 Strike 70.00 2,943,450 -------------- 20,367,260 -------------- Options on Currency - 0.0% USD 20,000 Thai Baht, Expires 8/29/97 Strike 26.10 208,000 -------------- TOTAL CALL OPTIONS PURCHASED (Cost $20,828,600) 20,575,260 -------------- Shares RIGHTS AND WARRANTS - 0.0% Mexico - 0.0% 99,271,000 Mexican Value Recovery Rights, Expires 6/30/03 -- -------------- Nigeria - 0.0% 14,000 Central Bank of Nigeria Payment Adjusted Warrants, Expires 11/15/20 -- -------------- Venezuela - 0.0% 312,840 Republic of Venezuela Recovery Warrants, Expires 4/15/20 -- -------------- TOTAL RIGHTS AND WARRANTS (Cost $0) -- -------------- Par Value SHORT-TERM INVESTMENTS - 6.9% Repurchase Agreements - 6.2% $ 5,474,450 Prudential Securities, Inc. Repurchase Agreement dated 2/28/97, due 3/3/97, with a maturity value of $5,476,626 and an effective yield of 4.77%, collateralized by a U.S. Government Agency Obligation with a rate of 0.00%, a maturity date of 3/27/97 and market value of $5,584,000. 5,474,450 29,203,555 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97 with a maturity value of $29,215,358 and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, maturity dates ranging from 11/15/03 to 5/15/20 and an aggregate market value of $29,819,250. 29,203,555 -------------- 34,678,005 -------------- U.S. Government - 0.7% 4,000,000 U.S. Treasury Bill, 5.56% due 1/08/98 (a) 3,816,852 -------------- TOTAL SHORT-TERM INVESTMENTS (Cost $38,494,204) 38,494,857 --------------
See accompanying notes to the financial statements. 5 GMO Emerging Country Debt Fund (A Series of GMO Trust) Schedule of Investment - continued (showing percentage of total net assets) February 28, 1997 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS - 97.4% (Cost $390,022,688) * * 540,817,801 Other Assets and Liabilities (net) - 2.6% 14,670,556 ----------- TOTAL NET ASSETS - 100.0% $555,488,357 ===========
Notes to the Schedule of Investments: DCB- Debt Conversion Bond. FLIRB- Front Loaded Interest Reduction Bond. PIK - Payment In Kind. PDI - Past Due Interest. Knock Out - Option will expire if underlying security reaches Knock Out price. 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. Variable and Step up rates - The rates shown on variable and step up rate notes are the current interest rates at February 28, 1997, which are subject to change based on the terms of the security. (a) All or a portion of this security is held as collateral for open futures contracts. (b) Principal is linked to the value of the Brazilian Capitalization Bond and the Brazilian IDU Bond. Restricted as to public resale. At the date of aquisition, this security was valued at cost. There were no outstanding unrestricted securities of the same class as those held. (c) Security contains a swap feature dated 12/5/95, expiring 3/24/97, with a current notional amount of ECU 500,000 to pay 7.80% and receive 6 mo. ECU LIBOR + .25% * Non-performing. Borrower not currently paying interest. * * The aggregate identified cost for federal income tax purposes is $390,022,688, resulting in gross unrealized appreciation and depreciation of $152,943,138 and $2,148,025, respectively, and net unrealized appreciation of $150,795,113. Currency Abbreviations AGP - Argentinian Peso CZK - Czech Koruna BEF - Belgian Franc DEM - German Mark ECU - European Currency Unit FRF - French Franc GBP - British Pound JPY - Japanese Yen NLG - Netherlands Guilder SDR - Special Drawing Rights USD - United States Dollar 6 See accompanying notes to the financial statements. GMO Emerging Country Debt Fund (A Series of GMO Trust) Statement of Assets and Liabilities - February 28, 1997
Assets: Investments, at value (cost $390,022,688)(Note 1) $ 540,817,801 Receivable for investments sold 27,099 598 Receivable for Fund shares sold 52,245 Receivable for open swap contracts (Notes 1 and 6) 1,508,059 Interest receivable 6,591,074 Receivable for open forward foreign currency contracts (Note 6) 9,361,742 Receivable for expenses waived or borne by Manager (Note 2) 91,354 Total assets 585,521,873 Liabilities: Payable for investments purchased 6,448,211 Payable for Fund shares repurchased 22,425,145 Payable to brokers for open futures contracts (Notes 1 and 6) 17,792 Payable for open forward foreign currency contracts (Note 6) 619,019 Payable to affiliate for (Note 2): Management fee 227,047 Shareholder service fee 68,117 Accrued expenses 228,185 -------------- Total liabilities 30,033,516 Net assets $ 555,488,357 Net assets consist of: Paid-in capital $ 298,584,032 Accumulated undistributed net investment income 21,594,553 Accumulated undistributed net realized gain 73,442,653 Net unrealized appreciation 161,867,119 -------------- $ 555,488,357 Net assets attributable to: Class I share $ 36,124 Class III shares $ 555,452,233 -------------- Shares outstanding: Class I 2,566 Class III 39,409,825 Net asset value per share: Class I $ 14.08 -------------- Class III $ 14.09
See accompanying notes to the financial statements. 7 GMO Emerging Country Debt Fund (A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1997 ------------------------------------------------------------------------------------------------------------------------- Investment income: Interest (including securities lending income of $76,117) $ 56,944,730 --------------------- Expenses: Management fee (Note 2) 3,190,658 Custodian fees 471,640 Legal fees 166,759 Audit fees 71,131 Transfer agent fees 22,492 Trustees fee (Note 2) 3,155 Miscellaneous 6,095 Fees waived or borne by Manager (Note 2) (986,384) --------------------- 2,945,546 Shareholder service fee (Note 2) Class I 12 Class III 722,023 --------------------- Net expenses 3,667,581 --------------------- Net investment income 53,277,149 --------------------- Realized and unrealized gain (loss): Net realized gain (loss) on: Investments 202,889,446 Closed futures contracts 2,681,151 Closed swap contracts 47,791 Written options 352,000 Foreign currency, forward contracts and foreign currency related transactions 17,842,274 --------------------- Net realized gain 223,812,662 --------------------- Change in net unrealized appreciation (depreciation) on: Investments 67,621,423 Open futures contracts (2,733,014) Open swap contracts 1,484,450 Written options (349,360) Foreign currency, forward contracts and foreign currency related transactions 7,984,410 --------------------- Net unrealized gain 74,007,909 --------------------- Net realized and unrealized gain 297,820,571 --------------------- Net increase in net assets resulting from operations $ 351,097,720 =====================
8 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 February 28, 1997 February 29, 1996 --------------------- --------------------- Increase (decrease) in net assets: Operations: Net investment income $ 53,277,149 $ 65,130,740 Net realized gain 223,812,662 61,081,420 Change in net unrealized appreciation (depreciation) 74,007,909 119,723,421 --------------------- ------------------- Net increase in net assets resulting from operations 351,097,720 245,935,581 --------------------- ------------------- Distributions to shareholders from: Net investment income Class III (60,410,173) (55,195,795) --------------------- ------------------- Net realized gains Class III (149,956,551) (30,587,693) --------------------- ------------------- (210,366,724) (85,783,488) --------------------- ------------------- Net share transactions: (Note 5) Class I 34,101 -- Class III (200,761,783) 211,881,606 --------------------- ------------------- Net (decrease) increase in net assets resulting from Fund share transactions (200,727,682) 211,881,606 --------------------- ------------------- Total (decrease) increase in net assets (59,996,686) 372,033,699 Net assets: Beginning of period 615,485,043 243,451,344 --------------------- ------------------- End of period (including accumulated undistributed net investment income of $21,594,553 and $13,630,078, respectively) $ 555,488,357 $ 615,485,043 ===================== ===================
See accompanying notes to the financial statements. 9 GMO Emerging Country Debt Fund (A Series of GMO Trust) Financial Highlights (For a Class I share outstanding throughout the period)
Period from December 31, 1996 (commencement of operations) to February 28, 1997 Net asset value, beginning of period $ 12.87 ----------- Income from investment operations: Net investment income 0.10 Net realized and unrealized gain 1.11 ----------- Total from investment operations 1.21 ----------- Net asset value, end of period $ 14.08 =========== Total Return (a) 9.40% Ratios/Supplemental Data: Net assets, end of period (000's) $ 36 Net expenses to average daily net assets 0.71%* Net investment income to average daily net assets 6.06%* Portfolio turnover rate 152% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.00
* Annualized. (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. See accompanying notes to the financial statements. 10 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, ---------------------------------------------------------- 1997 1996 1995* ---------------- ------------ ------------- Net asset value, beginning of period $ 11.76 $ 8.39 $ 10.00 ---------------- ------------ ------------- Income from investment operations: Net investment income 1.48 1.35 0.48 Net realized and unrealized gain (loss) 6.40 3.84 (1.59) ---------------- ------------ ------------- Total from investment operations 7.88 5.19 (1.11) ---------------- ------------ ------------- Less distributions to shareholders: From net investment income (1.58) (1.17) (0.40) From net realized gains (3.97) (0.65) - In excess of net realized gains - - (0.10) ---------------- ------------ ------------- Total distributions (5.55) (1.82) (0.50) ---------------- ------------ ------------- Net asset value, end of period $ 14.09 $ 11.76 $ 8.39 ================ ============ ============= Total Return (a) 74.32% 63.78% (11.65%) Ratios/Supplemental Data: Net assets, end of period (000's) $ 555,452 $ 615,485 $ 243,451 Net expenses to average daily net assets 0.57% 0.50% 0.50%** Net investment income to average daily net assets 8.35% 12.97% 10.57%** Portfolio turnover rate 152% 158% 104% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.03 $ 0.02 $ 0.01
* For the period from April 19, 1994 (commencement of operations) to February 28,1995. ** 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. See accompanying notes to the financial statements. 11 GMO Emerging Country Debt Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1997 - -------------------------------------------------------------------------------- 1. Significant accounting policies The 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 into classes. The Fund seeks high total return by investing primarily in sovereign debt of countries in Asia, Latin America, the Middle East, Southern Europe, Eastern Europe and Africa. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 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. 12 GMO Emerging Country Debt Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Certain investments in 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. 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 net exchange gains and losses on disposition of foreign currencies, 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 purchase of 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 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 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 held as of February 28, 1997. 13 GMO Emerging Country Debt Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 28, 1997. Options The Fund may write call and put options on securities it owns or in which it may invest. 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 transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price 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 28, 1997, the Fund had no outstanding written options. The Fund may also purchase put and call options. 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. The risk associated with purchasing put and call options is limited to the premium paid. 14 GMO Emerging Country Debt Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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. 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. Security lending The Fund may lend its securities to certain member firms of the New York Stock Exchange. 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 28, 1997, there were no securities on loan. 15 GMO Emerging Country Debt Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 interest rates. The Fund entered into interest rate swap agreements which 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. Interest rate 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 is 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 28, 1997. 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to the differing treatments for foreign currency transactions and redemptions in- kind. Gains resulting from such in-kind transactions amounted to $4,191,544. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments. 16 GMO Emerging Country Debt Fund (A Series of GMO Trust) Notes to Financial Statements - continued - --------------------------------------------------------------------------------
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital -------------------------- -------------------------- ------------------ $15,097,499 ($18,362,548) $3,265,049
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. 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 in such manner as deemed equitable by the Trustees, 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 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. Effective June 1, 1996, the Manager will reduce such premium or fee only when any portion of a purchase is offset by a corresponding redemption occurring on the same day. All purchase premiums and redemption fees are paid to and recorded as paid-in capital by the Fund. For the year ended February 28, 1997, the Fund received $600,562 in purchase premiums and $497,945 in redemption fees. There is no premium for reinvested distributions or in-kind transactions. 17 GMO Emerging Country Debt Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 .50% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .35% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .50%; thus the net annual expense ratio after the waiver for a Class III shareholder is unchanged. Additionally, effective March 1, 1996, the waiver was adjusted to exclude custodian fees. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997, was $3,155. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 18 GMO Emerging Country Debt Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 3. Purchases and sales of securities For the year ended February 28, 1997, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Proceeds ------------- --------------- U.S. Government securities $ 28,060,938 $ 28,074,975 Investments (non-U.S. Government securities) 794,039,650 1,065,835,431
4. Principal shareholders At February 28, 1997, 70% of the outstanding Class I shares of the Fund were held by four shareholders and 13% of the outstanding Class III shares of the Fund were held by one shareholder, each holding in excess of 10% of the outstanding shares of the respective class. 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, 1996 (commencement of operations) to February 28, 1997 ------------------------------- Class I: Shares Amount ------------ ------------ Shares sold 2,566 $ 34,101 Shares issued to shareholders in reinvestment of distributions - - Shares repurchased - - ------------ ------------ Net increase 2,566 $ 34,101 ============ ============
19 GMO Emerging Country Debt Fund (A Series of GMO Trust) Notes to Financial Statements - continued - --------------------------------------------------------------------------------
Year Ended Year Ended February 28, 1997 February 29, 1996 ------------------------------- -------------------------------- Class III: Shares Amount Shares Amount ------------- ------------- ------------- ---------------- Shares sold 11,310,056 $ 162,038,721 34,834,354 $ 342,519,546 Shares issued to shareholders in reinvestment of distributions 14,440,766 185,738,098 5,671,374 61,638,059 Shares repurchased (38,680,281) (548,538,602) (17,191,233) (192,275,999) ------------- ------------- ------------- ---------------- Net increase (decrease) (12,929,459) $ (200,761,783) 23,314,495 $ 211,881,606 ============= ============= ============= ================
6. Financial instruments A summary of outstanding financial instruments at February 28, 1997 is as follows:
Forward currency contracts Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ------------- --------------- ------------- ---------------- ------------------ Buys 4/30/97 FRF 46,800,000 $ 8,245,599 $ (82,863) 3/3/97 CZK 316,276,000 9,721,953 (278,047) 3/4/97 CZK 316,276,000 9,718,752 195,149 --------------- $ (165,761) =============== Sales 3/10/97 AGP 7,000,000 $ 7,000,000 $ (30,665) 3/14/97 AGP 3,000,000 2,999,520 (7,001) 4/7/97 AGP 7,000,000 6,992,728 (24,086) 3/7/97 DEM 39,600,000 23,466,927 3,132,570 5/22/97 ECU 1,850,000 2,132,914 (789) 4/30/97 FRF 816,800,000 143,910,370 4,056,860 4/18/97 GBP 8,600,000 14,017,940 509,180 4/10/97 JPY 3,613,000,000 30,114,185 1,467,983 3/3/97 CZK 316,276,000 9,721,953 (195,568) --------------- $ 8,908,484 ===============
20 GMO Emerging Country Debt Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Futures contracts
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) ----------- ------------------- --------------------------- ---------------- ---------------- Sales 200 Euro Dollar September 1997 $ 47,000,000 $ 153,500 38 MATIF Bond March 1997 4,857,002 (149,083) 62 MATIF Bond June 1997 7,135,946 (7,694) 200 U.S. Treasury Bill June 1997 47,385,000 60,975 500 U.S. Treasury Bond June 1997 55,218,750 823,906 ---------------- $ 881,604 ================
At February 28, 1997, the Fund has cash and/or securities to cover any margin requirements on open futures contracts. Written option transactions
Calls Principal Amount of Contracts (000's omitted) Premiums ------------------ ------------ Outstanding, beginning of period 40,000 $ 352,000 Options written 75,000 5,512,500 Options exercised (75,000) (5,512,500) Options expired (40,000) (352,000) ------------------ ------------ Outstanding, end of period - $ - ================== ============
GMO Emerging Country Debt Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Swap agreements
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------- -------------- -------------------------------------- ------------------- ECU 500,000 3/24/97 Agreement with Morgan Guaranty Trust $ (10,097) Company dated 12/5/95 to pay the notional amount multiplied by the 6 month ECU LIBOR plus a specified spread and to receive the notional amount multiplied by a specified rate. $ 54,278,259 2/26/99 Agreement with Credit Suisse 1,518,156 Financial Products dated 2/12/97 to purchase, for a set price, a specified amount of Bulgaria FLIRB Fixed/Floating Rate Note Series A due July 28, 2012 and Bulgaria FLIRB Fixed/Floating Rate Note Series B due July 28 2012. In the event of default by Bulgaria, the agreement to purchase the bonds is eliminated; in its place, Credit Suisse Financial Products acquires the option to sell the same amount of the bonds to the Fund for a lower set price. ------------------ $ 1,508,059 ==================
See Notes to the Schedule of Investments for definitions of currency abbreviations. 22 GMO Emerging Country Debt Fund (A Series of GMO Trust) Federal Income Tax Information on Distributions - (Unaudited) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all the Fund's distributions are from investment company taxable income, except that the Fund has designated 23.44% of distributions as net capital gain dividends. 23 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. since 1993. Management Discussion and Analysis of Fund Performance - ------------------------------------------------------ The Class III shares of the Emerging Country Debt Fund returned 74.3% for the fiscal year ended February 28, 1997, compared to 43.3% for the J.P. Morgan Emerging Market Bond Index Plus. Consistent with the Fund's investment objectives and policies, the Fund was substantially invested in sovereign debt instruments of emerging countries throughout the period. The past year was an exceptional period for emerging country debt. The trend toward improving sovereign credit fundamentals and narrowing yield spreads which began in March 1995 continued into 1997. During the year sovereign yield spreads fell to levels not seen since the end of 1993, new investors entered the market, and confidence returned. The Fund performed exceptionally well in this environment, outperforming its benchmark by 31.0% for the fiscal year. The value was added through security selection primarily, with secondary emphasis placed on active country allocation. The Fund remained fully invested throughout the period. The longer-dated, less-marketable holdings favored by the managers rose in price as liquidity premiums contracted. An overweighted position in Russian loans helped performance as did holdings of Ivory Coast loans. Both of these countries announced restructuring programs enabling holders of the defaulted loans to exchange them for interest-paying bonds. These restructuring programs caused the value of the loans held by the Fund to increase significantly. Outlook - ------- There remain many opportunities in emerging country debt. The Fund retains an overweighted position in Russian debt and holds issues of many countries not in the benchmark. These include: Algeria, Costa Rica, the Dominican Republic, Ivory Coast, Jamaica, Jordan and Yugoslavia. The outlook for these markets is generally good, though the managers do not expect returns to be near those of the past two years. 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 $10,000 Investment in GMO Emerging Country Debt Fund Class III shares and the J.P. Morgan Emerging Markets Bond Index Plus As of February 28, 1997
Average Annual Total Return Since 1 Year 5 Year Inception Class III 4/19/94 73.0% n/a 37.7% Class I 12/31/96 n/a n/a 8.7%
[LINE GRAPH APPEARS HERE]
J.P. Morgan Emerging Markets Date GMO Emerging Country Debt Fund Bond Index + 04/19/94 9,950 10,000 02/28/95 8,792 9,220 02/29/96 14,364 13,030 02/28/97 25,040 18,668
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of fund investments will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been waived during the periods shown, and do not include the effect of taxes on reinvested distributions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 50 bp on the purchase and 25 bp on the redemption. Transaction fees are paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Performance for Class I shares may be different due to higher shareholder service fees. Class II shares have not commenced operations. Past performance is not indicative of future performance, Information is unaudited. GMO Emerging Country Debt Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total assets) February 28, 1997
Par Value Description Value ($) - ---------------------------------------------------------------------------------------------------------------------------- DEBT OBLIGATIONS - 49.9% Argentina - 10.1% AGP 35,134,370 Argentina Pro-1 Co-Participation Rights, Variable Rate, 1 mo. Peso Deposit Rate (3.22%), due 4/01/07 23,169,845 USD 10,000,000 Republic of Argentina Bocon Pro 1, PIK, Variable Rate, 1 mo. Peso Deposit Rate (3.22%), due 4/01/07 10,300,000 USD 9,000,000 Republic of Argentina Discount Bond Variable Rate, 6 mo. LIBOR + .81% (6.38%), due 3/31/23 7,470,000 USD 15,000,000 Republic of Argentina Par Bond, Variable Rate, Step Up (5.25%) due 3/31/23 9,975,000 USD 5,000,000 Republic of Argentina, 11.75% due 2/12/07 144A 5,260,000 ----------- 56,174,845 ----------- Brazil - 5.3% USD 33,073,835 Brazil Capitalization Bond, PIK. 8.00% due 4/15/14 26,190,343 USD 4,000,000 Brazil Discount ZL Bond, Variable Rate. 6 mo.L LIBOR + .81% (6.50%), due 4/15/24 3,280,000 ----------- 29,470,343 ----------- Costa Rica - 0.8% USD 2,530,192 Central Bank of Costa Rica Interest Series A, Variable Rate, 3 mo. LIBOR + .81% (6.31%), due 5/21/05 2,353,079 USD 1,439,592 Central Bank of Costa rica Interest Series B, Variable Rate, 3 mo. LIBOR + .81% (6.31%), due 5/21/05 1,281,235 USD 1,000,000 Central Bank of Costa Rica Principal Bond Series A, 6.25% due 5/21/10 830,000 ----------- 4,464,314 Dominican Republic - 1.6% USD 11,957,000 Dominican Republic Discount Bond, Variable Rate 6 mo. LIBOR + .81% (6.38%), due 8/30/24 8,848,180 ----------- Ecuador - 5.7% USD 8,215,000 Republic of Ecuador Discount Bond (Global Registered), Variable Rate, 6 mo. LIBOR + .81 (6.44%), due 2/28/25 5,668,350 USD 46,500,000 Republic of Ecuador Par Bond, Variable Rate, Step up (3.25%), due 2/28/25 20,925,000 USD 6,484,768 Republic of Ecuador PDI, (Registered), PIK, Variable Rate, 6 mo. LIBOR + 81% (6.44), due 2/27/15 4,020,556 USD 1,848,820 Republic of Ecuador PDI, (Global Bearer Capitalization Bond), PIK, Variable Rate, 6 mo. LIBOR + .81% (6.44%), due 2/27/15 1,146,268 ----------- 31,760,174 ----------- Jordan - 5.1% USD 14,750,000 Hashemite Kingdom of Jordan Par Bond, Variable Rate, Step up (4.00%), due 12/23/23 144A 9,808,750 USD 3,070,939 Hashemite Kingdom of Jordan PDI (Registered), Variable Rate, 6 mo. LIBOR + .81% (6.50%), due 12/23/05 144A 2,886,683 USD 16,470,753 Hashemite Kingdom of Jordan PDI, Variable Rate, 6 mo. LIBOR + .81% (6.50%), due 12/23/05 15,482,508 ----------- 28,177,941 -----------
See accompanying notes to the financial statements. 1 GMO Global Hedged Equity Fund (A Series of GMO Trust) Annual Report February 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 22, 1997 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- STOCK AND EQUIVALENTS - 79.8% Australia - 2.5% 22,448 Adelaide Brighton Ltd 32,235 14,100 Advance Property Fund 16,307 3,800 Amalgamated Holdings Ltd 17,550 111,803 Australia and New Zealand Banking Group Ltd 697,723 4,400 Australian Gas & Light 25,171 94,485 Australian National Industries Ltd 104,875 57,296 Boral Ltd 155,656 25,802 Bougainville Copper Ltd * 11,215 6,800 Broken Hill Proprietary Ltd 89,993 47,835 Burns Philp & Co Ltd 74,259 12,200 Capral Aluminum Ltd 42,045 5,700 Coca-Cola Amatil Ltd 52,207 42,960 Coles Myer Ltd 189,069 7,065 Commonwealth Bank of Australia 70,303 7,983 Consolidated Rutile Ltd 6,444 9,184 Cortecs International Ltd * 34,574 1,800 Coventry Group Ltd 7,195 7,800 CRA Ltd 116,801 4,900 CSL Ltd 24,912 121,432 CSR Ltd 428,863 23,000 Cultus Petroleum * 37,848 2,495 Dominion Mining Ltd Warrants 12/31/98 * 775 4,990 Dominion Mining Ltd * 3,447 20,660 Email Ltd 65,268 1,000 Emperor Mines Ltd * 1,746 3,900 Faulding (FH) & Co Ltd 22,704 7,804 Foodland Associated 37,556 32,310 Fosters Brewing Group Ltd 67,463 2,763 G E Crane Holdings Ltd 25,092 28,606 General Property Trust Units 55,732 152,241 Goodman Fielder Ltd 184,344 69,184 Hardie (James) Industries Ltd 198,692 6,000 HIH Winterthur International Holdings 14,391 200 Jupiters Ltd 432 4,300 KLZ Ltd 11,815 7,599 Leighton Holdings 33,031 14,400 Macmahon Holdings 11,177 7,900 Mayne Nickless Ltd 46,664 5,198 Metal Manufactures Ltd 12,669 8,900 Mirvac Ltd 18,238 1,204 Mount Leyshon Gold Mines 2,075 15,842 National Australia Bank Ltd 199,450 3,344 National Consolidated Ltd 2,440 204,292 News Corp Ltd 1,087,800 108,981 News Corp Ltd Preferred 1.19% 492,320 10,210 Normandy Mining Ltd 14,107 15,777 North Broken Hill Peko Ltd 51,066
See accompanying notes to the financial statements. 1 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Austraila - continued 18,579 Orbital Engine Corp * 14,854 200 Pacific BBA Ltd 668 120,613 Pacific Dunlop Ltd 290,221 138,600 Pioneer International Ltd 412,036 23,507 PMP Communications Ltd 59,300 5,900 Portman Mining Ltd 12,182 2,200 Publishing & Broadcasting Ltd 11,014 28,190 Qantas Airways Ltd 53,390 3,300 QBE Insurance Group Ltd 16,521 27,992 QNI Ltd 57,795 2,900 Reinsurance Australia 9,859 7,531 RGC Ltd 29,929 12,526 Rothmans Holdings Ltd 84,587 28,294 Santos Ltd 101,903 83,317 Schroders Property 153,916 2,769 Sea World Property Trust 3,654 1,141 Seven Network Ltd 3,782 928 Siddons Ramset Ltd 4,812 4,501 Simsmetal Ltd 27,258 3,400 Smith (Howard) Ltd 28,521 12,500 Southcorp Holdings Ltd 44,243 1,187 St George Bank 7,094 76,591 Stockland Trust Group 196,779 6,600 Tabcorp Holdings 30,276 900 Ticor Ltd * 747 2,300 Village Roadshow 7,623 900 W H Soul Pattison & Co Ltd 39,120 18,377 Walker Corp 12,980 1,700 Westfield Holdings 26,259 125,721 Westfield Trust Units 242,010 5,945 Weston Foods Ltd 34,609 63,400 Westpac Banking Corp 359,241 5,200 Westpac Property Trust 7,185 12,611 Wills (WD & HO) Holdings Ltd 24,570 ------------------ 7,304,677 ------------------ Austria - 0.7% 61 Allgemeine Baugesellschaft AG * 5,494 242 Austrian Airlines * 36,052 1,704 Bank Austria AG (Participating Certificate) 50,197 1,459 Bau Holding AG Preferred 2.42% (Non Voting) 69,995 2,220 Brau Union AG 125,189 2,802 Creditanstalt-Bankverein 172,159 2,323 Creditanstalt-Bankverein Preferred 1.65% 88,942 207 EA-Generali AG 57,494 120 EA-Generali AG Preferred 6.00% 12,494 1,191 EVN Energie-Versorgung Niederoesterreich AG 175,324 495 Jenbacher Werke AG 14,374 425 Lenzing AG 20,461
2 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 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Austria - continued 783 Leykam-Muerztaler Papier und Zellstoff AG 21,814 318 Miba Holding AG Class B Preferred 1.34% 13,811 1,967 OEMV AG 231,778 2,019 Oesterreichische Brau Beteiligungs AG 124,051 4,199 Oesterreichische Elektrizitaetswirtschafts AG 304,998 2,829 Oesterreichische Laenderbank AG 193,581 1,608 Oesterreichische Laenderbank AG Preferred (Non Voting) 56,437 267 Perlmooser Zementwerke AG 13,821 1,380 Radex-Heraklith AG 50,055 402 RAS Versicherungs AG 49,704 739 Steyr-Daimler-Puch AG * 13,062 178 Strabag Oesterreich AG 10,352 332 Universale Bau AG 13,133 108 Wiener Allianz Versicherungs AG 12,271 405 Wienerberger Baustoffindustrie AG 73,527 ------------------ 2,010,570 ------------------ Canada - 2.1% 6,600 Abitibi-Price Inc 108,881 877 Agrium Inc * 12,030 7,500 Air Canada Inc * 37,859 4,000 Alberta Energy Ltd 84,132 2,300 Anderson Exploration Ltd * 27,343 500 Avenor Inc 8,614 3,390 Bank of Nova Scotia 129,211 2,200 BC Telecom Inc 48,123 6,610 BCE Inc 321,094 700 BCE Mobile Communications * 22,277 600 Bombardier Inc Class A 11,479 9,600 Bombardier Inc Class B 184,359 2,500 Brascan Ltd Class A (Convertible) 59,898 1,600 CAE Industries Inc 13,344 20,400 Canadian Imperial Bank of Commerce 989,480 1,400 Canadian Marconi Co 17,770 2,200 Canadian National Railway 79,669 1,600 Canadian Pacific Ltd 39,330 4,100 Canadian Tire Corp Ltd Class A 74,687 1,100 Canfor Corp 11,669 1,600 CCL Industries Class B 18,611 400 Cinram Ltd 10,930 1,800 Corel Corp * 11,720 1,300 Co-Steel Inc 21,399 6,000 Cott Corp * 59,039 3,900 Dofasco Inc 70,616 4,100 Dominion Textile Inc 19,197 22,800 Domtar Inc 207,667 2,400 Donohue Inc Class A 46,177 500 Dupont Canada Class A 12,089 3,000 Echo Bay Mines Ltd * 23,264 1,200 Edper Group Ltd Class A 20,543 600 Falconbridge Ltd 14,002
See accompanying notes to the financial statements. 3 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Canada - continued 10,600 Fletcher Challenge Canada Class A 176,033 8,500 Gulf Canada Resources Ltd * 59,697 1,900 Hudsons Bay Co 38,017 8,500 Imasco Ltd 233,192 5,800 Imperial Oil Ltd 254,591 2,900 Inco Ltd 102,155 2,000 Inmet Mining Ltd * 13,461 1,200 International Forest Products A * 8,779 600 Ipsco Inc 17,339 4,300 Laidlaw Inc Class B (Non Voting) 59,613 19,200 Macmillan Bloedel Ltd 265,477 1,200 Magna International Class A 63,253 1,200 MDS Inc Class B 24,362 5,800 Methanex Corp * 56,859 2,000 Molson Co Ltd, Class A 34,823 3,800 Moore Corporation Ltd 83,956 6,800 Newbridge Networks Corp * 216,153 7,700 Noranda Forest Inc 53,515 100 Noranda Inc 2,411 27,200 Nova Corp of Alberta 249,733 4,900 Nova Scotia Power Inc 50,724 1,700 Oshawa Group Ltd Class A 25,433 1,600 Pegasus Gold Inc * 13,754 200 Potash Corp of Saskatchewan 15,751 5,100 Provigo Inc * 21,081 500 QLT Phototherapeutics * 13,534 2,400 Quebecor Inc Class B 44,071 700 Rio Algom Ltd 17,796 2,900 Rogers Cantel Mobile Communications Class B * 48,797 1,900 Rogers Communications Inc Class B * 12,997 3,900 Royal Oak Mines * 13,410 8,900 Seagram Ltd 347,366 1,700 Sears Canada Inc 16,355 3,400 Semi-Tech Class A 6,840 400 Shell Canada Ltd Class A 16,387 700 Slocan Forest Products Ltd 7,528 2,000 Southam Inc 30,873 6,900 Stelco Inc Class A * 37,859 1,100 Suncor Inc 49,009 6,000 Telus Corp 90,863 5,100 Thomson Corp 105,030 700 Torstar Corp Class B 18,743 600 Total Petroleum North America 6,145 8,700 Transalta Corp 103,427 11,300 Transcanada Pipelines Ltd 209,565 2,300 United Dominion Inds Ltd 62,174 576 Westaim Corp * 1,896 6,100 Westcoast Energy Inc 110,897 700 Weston (George) Ltd 38,357 ------------------ 6,366,584 ------------------
4 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 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Finland - 0.2% 1,500 Amer Group Class A 31,431 600 Cultor OY Class 1 36,346 11,000 Enso OY Class A 93,944 400 Finnair Class A 3,098 400 Huhtamaki OY Class L 18,749 1,000 Instrumentarium OY, Class A 37,538 100 Instrumentarium OY, Class B 3,674 1,100 Kesko OY 16,058 900 Metra AB Class A 52,911 100 Metra AB Class B 5,958 2,700 Partek OY 44,670 4,863 Rautaruukki OY 45,782 200 Stockmann AB Class A 11,599 200 Stockmann AB Class B 10,924 1 Unitas Bank Ltd Class A 4 4,400 Valmet OY 79,962 ------------------ 492,648 ------------------ France - 3.6% 940 Accor SA 129,353 390 Air Liquide L Shares 61,334 1,160 Alcatel Alsthom Cie Generale d'Electricite SA 119,109 9,900 Assurances Generales De France (Bearer) 348,402 6,234 Axa SA 415,031 6,234 Axa UAP * 22,322 9,858 Banque Nationale de Paris 447,281 700 Bertrand Faure SA 34,881 170 BIC SA 27,571 40 BIS SA 3,430 45 Bongrain 17,440 870 Bouygues 83,071 350 Canal Plus 65,610 300 Cap Gemini SA * 17,966 1,550 Casino Guichard-Perrachon 70,735 550 Casino Guichard-Perrachon Preferred 21,093 4,400 Cerus * 106,886 200 Cetelem 24,784 550 CGIP 156,873 3,954 Cie Bancaire SA 479,563 70 Cie Generale de Geophysique * 6,002 430 Ciments Francais 14,642 830 Ciments Francais Class B Preferred 15.12% 32,691 112 Clarins 15,530 320 Club Mediterranee SA 24,573 112 Colas SA 15,511 8,955 Compagnie de Suez SA 437,588
See accompanying notes to the financial statements. 5 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- France - continued 2,489 Credit Commercial de France 116,645 1,897 Credit Local de France SA 189,457 3,640 Credit Lyonnais * 144,711 712 Credit National 46,864 570 Dollfus-Mieg and Cie 16,168 7,090 Elf Aquitaine SA 678,225 80 Elf Gabon 21,484 870 Elf Sanofi SA 86,125 1,360 Eridania Beghin-Say SA 219,852 100 Essilor International 27,452 100 Esso 11,058 28,500 Euro Disney SCA (Bearer) * 52,275 44,600 Eurotunnel SA Units (Bearer) * 55,189 3,170 Financiere de Paribas SA 215,829 3,093 FINEXTEL 52,389 3,275 GAN (Group Assurances National) * 85,708 63 Gaz Et Eaux 27,866 682 Generale Des Eaux 94,927 420 Group Axime * 53,815 100 Groupe Andre * 8,425 550 Groupe Danone 83,408 30 Guyenne Et Gascogne 10,321 70 Havas Advertising 8,478 200 INGENICO SA 3,668 130 Labinal SA 29,549 8,829 Lafarge Coppee SA 553,236 2,122 Lagardere Groupe 62,573 200 Legris Industries 9,513 925 Lyonnaise Des Eaux 94,492 6,100 Michelin SA Class B 382,020 1,200 Moulinex SA * 27,803 1,120 Nord-Est 29,861 494 Pechiney SA Class A 20,888 175 Pernod-Ricard 9,553 3,924 Peugeot SA 433,911 50 Pinault Printemps Redoute 21,159 400 Remy Cointreau SA 10,426 6,230 Renault SA 160,635 14,268 Rhone Poulenc SA Class A 500,869 370 Saint Louis 97,155 2,744 Saint-Gobain 404,571 470 Salomon SA 32,280 760 Seita 29,080 930 SGS Thomson Microelectronics * 61,132 7,420 Skis Rossignol 201,868 600 Societe Eurafrance 283,292 988 Societe Generale d 'Entreprise SA * 22,874 5,228 Societe Generale Paris 605,634
See accompanying notes to the financial statements. 6 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- France - continued 10 Sodexho Alliance 5,564 2,700 Sommer Allibert 81,986 3,673 SPIE Batignolles 193,472 260 Strafor Facom 20,536 140 Sylea (Bearer) 13,515 90 Synthelabo 9,763 200 Technip SA (Compagnie Francaise) 20,220 5,172 Thomson CSF 163,858 2,360 Total SA 188,268 270 TV Francaise 25,022 8,600 Usinor Sacilor 132,835 1,550 Valeo 104,471 510 Vallourec 30,122 1,320 Worms et Compagnie SA 88,042 ------------------ 10,671,659 ------------------ Germany - 2.5% 1,150 Adidas AG 110,014 4,595 AGIV AG * 75,939 50 Axel Springer Verlag AG 34,948 700 Bankgesellschaft Berlin AG 13,393 16,350 BASF AG 602,883 33,000 Bayer AG 1,392,720 2,400 Bayerische Hypotheken-und Wechsel - Bank AG 70,939 50 Bayerische Motorenwerke AG 33,645 7,545 BHF Bank AG 178,770 750 Bilfinger & Berger 30,210 50 Buderus AG 22,805 7,166 Continental AG 139,653 150 Degussa 63,973 236 Deutsche Babcock & Wilcox * 10,624 100 DLW AG * 8,263 3,600 Douglas Holdings AG 126,881 1,100 Draegerwerk AG Preferred 15,703 26,432 FAG Kugelfischer 403,948 1,700 Fresenius AG Preferred 366,544 150 Friedrich Krupp AG 23,972 2,550 Gerresheimer Glas AG 54,831 76 Hamburgische Electricitaets-Werke AG 21,699 900 Heidelberg Port-Zement 74,103 900 Henkel KGAA Preferred 47,980 5,690 Klockner Humboldt Deutz * 28,312 356 Klockner-Werke AG * 22,353 3,959 Kolbenschmidt * 63,083 200 Leirheit AG 6,634 113,250 Lufthansa AG 1,502,666 100 MAN AG 25,560 100 MAN AG Preferred 21,295 11,322 Metallgesellschaft * 241,369
See accompanying notes to the financial statements. 7 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Germany - continued 350 Pfaff (GM) AG * 7,567 7,400 Phoenix AG 108,269 250 Preussag AG 64,196 900 Puma AG Preferred 31,454 14,300 RWE Preferred 519,669 100 Schmalbach-Lubeca 20,495 500 SGL Carbon AG 68,120 4,100 Siemens AG 207,283 7,750 SKW Trostberg AG 235,961 50 Suedzucker AG 22,657 500 Thyssen AG 106,060 1,400 Veba AG 80,109 350 Viag AG 154,558 ------------------ 7,462,110 ------------------ Hong Kong - 4.9% 765,000 Allied Properties Ltd 140,276 350,000 Amoy Properties Ltd 418,066 40,000 ASM Pacific Technology 33,316 527,000 Cathay Pacific Airways Ltd 820,035 50,000 Century City International 17,756 224,000 Champion Technology Holdings 33,843 44,800 Champion Technology Holdings Warrants 6/30/98 * 2,719 138,000 Cheung Kong Holdings 1,314,243 26,500 China Light & Power Co 122,508 402,000 China Overseas Land & Investment Ltd 234,898 200 Chinese Estates Holdings Ltd 213 100,000 CP Pokphand Co * 36,157 4,000 Dah Sing Financial Services 16,736 61,800 Dao Heng Bank 317,619 162,000 Denway Investments * 14,016 20,066 Dickson Concept International Ltd 73,200 251,100 Elec & Eltek International Holdings Ltd 64,202 309 Evergo China Holdings * 48 63,000 FPB Bank Holding Co 29,084 12,300 Furama Hotel Enterprises Ltd 20,648 74,000 Gold Peak Industry 48,257 2,000 Goldlion Holdings Ltd 1,782 173,770 Great Eagle Holdings Ltd 651,862 163,000 Guangzhou Investment Co 82,616 42,000 Guoco Group 234,840 377,700 Hang Lung Development Co Ltd 760,863 4,000 Harbour Centre Development Ltd 5,914 600,000 Henderson Investment Ltd 674,070 83,680 HKR International Ltd 126,428 72,000 Hon Kwok Land Investment 26,266 55,000 Hong Kong Ferry Co Ltd 104,759 59,100 Hongkong Aircraft Engineering Co Ltd 187,359 213,000 Hongkong Electric Holdings Ltd 737,138
See accompanying notes to the financial statements. 8 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Hong Kong - continued 93,000 Hysan Development Co Ltd 326,052 19,700 Johnson Electric Holdings Ltd 54,440 19,892 Kantone Holdings Ltd * 2,954 168,000 Kumagai Gumi Hong Kong Ltd 191,994 122,000 Lai Sun Development 182,748 59,700 Lai Sun Garment International Ltd 87,114 60,000 Leading Spirit Holdings 14,101 33,800 Liu Chong Hing Bank Ltd 64,161 58,000 Liu Chong Hing Investment Ltd 72,275 1,000 National Mutual Asia Ltd 1,091 42,600 New Asia Realty & Trust A Shares 154,854 160,724 New World Development Co Ltd 996,223 91,200 Oriental Press Group 37,980 17,800 Oriental Press Group Warrants 10/2/98 * 954 120,000 Paul Y- ITC Construction Holdings Ltd 27,583 200 Peregrine Investments Holdings 365 27,700 Playmate Toys Holding 6,796 5,000 Realty Development Corp Ltd Class A 19,273 1,357,397 Regal Hotels International Ltd 403,153 5,200 San Miguel Brewery Ltd 2,182 50,000 Shaw Brothers Ltd 57,141 66,000 Shell Electric Co Ltd 43,040 316,000 Shun Tak Holdings Ltd 224,432 161,700 Sino Land Co Ltd 185,838 515,000 South China Morning Post Ltd 462,197 95,000 Sun Hung Kai Properties Ltd 1,101,014 149,000 Sun Hung Kai & Co Ltd 39,443 39,800 Sun Hung Kai & Co Ltd Warrants 2/18/00 * 3,443 166,000 Swire Pacific Ltd Class B 226,149 123,300 Tai Cheung Holdings Ltd 111,454 40,000 Tem Fat Hing Fung 12,784 24,000 Texwinca Holdings Ltd 18,285 8,900 Union Bank of Hong Kong 13,791 144,000 Wharf Holdings Ltd 639,669 412,900 Wheelock & Co Ltd 1,111,695 9,900 Wing Lung Bank 70,632 103,500 Winsor Industrial Corp Ltd 25,260 22,300 Winsor Properties Holdings Ltd * 41,323 248,000 World Trade Centre Group Ltd 48,678 174,000 Yizheng Chemical Fibre Co 40,669 182,000 Yue Yuen Industrial Holding 74,032 ------------------ 14,548,999 ------------------ Italy - 2.4% 52,100 Alitalia Linee Aeree Italiane Class A * 18,805 2,000 Alleanza Assicurazioni di Risp (Non Convertible) 10,769 8,000 Alleanza Assicurazioni SPA 57,609 6,800 Ansaldo Transporti SPA * 7,001 2,500 Assicurazioni di Milano 6,953 34,000 Assicurazioni Generali SPA 617,633
See accompanying notes to the financial statements. 9 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Italy - continued 305,000 Autostrade Concessioni e Costruzioni SPA Class B Preferred 6.39% 629,852 37,000 Banca Commerciale Italiana SPA 74,876 197,057 Banca di Roma * 144,703 87,763 Banca Fideuram SPA 221,225 16,666 Banca Nazionale dell'Agricoltura * 11,489 3,100 Banca Popolare di Bergamo Credit 46,041 24,000 Banca Popolare di Milano 131,361 9,300 Banca Toscana 17,609 10,000 Banco Ambrosiano Veneto SPA (Non Convertible) 18,402 8,000 Banco Ambrosiano Veneto SPA 20,355 157,562 Banco di Napoli di Risp * 70,856 1,000 Bulgari SPA 17,101 10,000 Caffaro SPA 9,592 10,000 Cartiere Burgo SPA 45,858 15,000 Cementir Cementerie del Tirreno SPA 9,630 70,870 Cia Italiana del Grandi Alberghi Cigahotels SPA * 33,045 10,400 COFIDE SPA (Non Convertible) * 2,708 38,600 COFIDE SPA * 16,217 36,810 Cogefar Impresit Costruzioni Generali SPA * 27,466 13,250 Comau Finanziaria SPA 40,377 27,500 Compart SA * 12,123 12,500 Compart SPA * 6,280 35,000 Credito Italiano 47,840 80,600 Dalmine SPA * 17,837 500 Danieli and Co SPA 3,652 69,400 Edison SPA 381,495 1,000 Editoriale L'Espresso SPA 3,373 1,450 Ericsson SPA 18,618 7,300 Falck Acciaierie and Ferriere Lombarde 32,375 23,000 Fiat SPA 71,041 121,000 Fiat SPA Preferred 203,337 175,000 Fiat SPA (Non Convertible) 296,154 16,200 Finmeccanica SPA * 7,199 4,000 Fondiaria SPA 15,361 111,300 Gemina * 63,158 47,500 Gilardini SPA 63,661 26,400 IFI Istituto Finanziario Preferred 2.46% 324,142 7,100 IFIL Finanziaria di Partecipazioni SPA 21,216 63,700 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 122,500 40,000 Industriali Riunite SPA (Non Convertible) * 16,379 45,050 Industriali Riunite SPA * 29,962 31,000 Istituto Bancario San Paolo 219,935 23,000 Istituto Mobilaire Italiano 200,876 287,493 Istituto Nazionale Delle Assicurazioni 375,952 2,400 Italcementi Fabbriche Riunite Cemento SPA 13,030 15,250 Italcementi Fabbriche Riunite Cemento SPA (Non Convertible) 37,087 2,500 Italmobiliare SPA 39,349 17,000 Mediobanco SPA 111,003
10 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 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Italy - continued 2,600 Merloni Elettrodomestici SPA 5,777 400 Mondadori Editore 2,615 65,000 Montedison SPA (Non Convertible) * 43,846 565,000 Montedison SPA * 407,870 53,013 Montefibre SPA 32,592 59,250 Olivetti and Co SPA * 21,737 169,234 Parmalat Finanziaria SPA 232,822 58,000 Permafin Finanziaria * 17,160 17,600 Pirelli and Co 24,682 1,500 Pirelli and Co (Non Convertible) 1,842 5,000 Pirelli SPA 9,896 7,000 Pirelli SPA (Non Convertible) 10,811 7,500 RAS SPA 67,633 5,000 RAS SPA (Non Convertible) 27,071 1,500 SAFILO SPA 24,941 2,000 SAI 16,746 6,000 Sasib SPA (Non Convertible) 11,751 93,040 SMI (Societa Metallurgica Italy) * 41,455 10,000 Snia BPD SPA 9,976 8,600 Snia BPD SPA (Non Convertible) 6,412 7,500 Sopaf SPA 8,432 7,350 Stefanel SPA * 6,589 30,000 STET di Risp (Non Convertible) 104,911 43,769 Telecom Italia Mobile SPA (Non Convertible) 66,948 190,000 Telecom Italia Mobile SPA 497,485 61,400 Telecom Italia RNC 123,527 113,100 Telecom Italia SPA 265,685 1,000 Toro Assicurazioni 12,426 4,500 Unione Cementi Marchino Emiliane e di Augusta-Casale (Non Convertible) 11,822 ------------------ 7,177,928 ------------------ Japan - 7.0% 2,000 77th Bank 16,323 6,000 Advantest Corp 339,050 4,000 Aisin Seiki Co Ltd 56,011 1,000 Aiwa Co 18,643 7,000 Alps Electric Co Ltd 74,240 6,000 Amada Co Ltd 43,798 3,000 Anritsu Corp 34,303 72,000 Aoki Corp * 103,803 2,000 Aoyama Trading 50,211 8,000 Asahi Breweries Ltd 77,554 2,000 Asahi Chemical Industries 10,821 12,000 Ashikaga Bank Ltd 40,070 1,000 Bandai Co 20,631 1,000 Bank of Yokohama Ltd 4,789 2,000 Banyu Pharmaceutical Co Ltd 29,166 1,100 Canon Sales Co Inc 21,327 5,000 Casio Computer Co 38,528
See accompanying notes to the financial statements. 11 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Japan - continued 3,700 Chubu Electric Power Co Inc 65,300 7,000 Chugai Pharmaceutical Co Ltd 55,274 1,900 Chugoku Electric Power Co Inc 32,902 6,000 Citizen Watch Co 42,754 20,000 Cosmo Oil Co Ltd 77,885 2,000 Credit Saison Co 42,588 8,600 CSK Corp 204,507 53,000 Daicel Chemical Industries Ltd 228,354 3,000 Daifuku Ltd 35,297 7,000 Daiichi Seiyaku Co Ltd 114,260 6,000 Daikin Industries Ltd 47,030 5,000 Daikyo Inc 18,850 5,000 Dainippon Pharmaceutical Co Ltd 35,794 15,000 Dainippon Printing Co Ltd 249,814 14,000 Dainippon Screen Manufacturing Co Ltd 112,984 1,000 Daishowa Paper Manufacturing * 4,019 1,400 Daito Trust Construction Co Ltd 13,688 3,000 Daiwa House Industry Co Ltd 33,308 7,000 Denso Corp 134,560 36 East Japan Railway Co 153,318 5,000 Eisai Co Ltd 93,628 2,800 Fanuc Co 87,000 7,000 Fuji Electric Co 28,884 18,000 Fuji Heavy Industries Ltd 85,757 6,000 Fuji Photo Film Co Ltd 200,845 13,000 Fujikara Ltd 101,897 27,000 Fujisawa Pharmaceutical Co Ltd 234,899 2,000 Fujitec Co 18,394 38,000 Fujitsu Ltd 374,679 8,000 Furukawa Electric Co Ltd 37,186 12,000 Gakken Co Ltd 54,188 12,000 General Sekiyu (KK) 72,583 8,000 Green Cross Corp 33,143 20,000 Hankyu Corp 95,948 55,000 Haseko Corp * 106,637 12,000 Hazama-Gumi Ltd 26,846 1,000 Hirose Electric 56,011 32,000 Hitachi Ltd 275,748 7,000 Hitachi Maxell Ltd 140,360 5,000 Hitachi Metals Ltd 34,800 1,600 Hokkaido Electric Power 27,310 2,000 Hokuriku Bank Ltd 6,877 5,000 Honda Motor Co Ltd 154,528 1,000 Hosiden Corp * 6,885 1,000 House Foods Corp 13,920 2,000 Hoya Corp 85,177 16,000 INAX Corp 105,394 4,000 Intec Inc 47,394
12 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 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Japan - continued 3,000 Ito-Yokado 136,217 6,000 Japan Airport Terminal Co Ltd 61,148 3,000 Japan Metals & Chemicals * 7,656 4,000 Japan Radio Co 38,446 36,000 Japan Synthetic Rubber Co Ltd 255,332 15 Japan Tobacco Inc 100,671 4,000 JGC Corp 22,835 7,000 Joshin Denki Co Ltd 63,220 2,000 Kaken Pharmaceutical Co Ltd 10,324 5,000 Kamigumi Co Ltd 26,349 2,000 Kandenko Co 16,903 8,000 Kanebo Ltd * 13,854 4,000 Kansai Electric Power 72,583 2,000 Kansai Paint Co Ltd 8,269 7,000 Kao Corp 76,560 1,000 Katokichi Co Ltd 16,074 9,000 Kawasaki Heavy Industry 37,286 13,000 Kawasaki Kisen * 26,498 7,000 Kenwood Corp * 29,870 2,000 Kinden Corp 26,017 20,000 Kirin Brewery Co Ltd 170,685 1,000 Kissei Pharmaceutical Co Ltd 19,969 21,000 Kobe Steel * 38,802 2,000 Kokusai Electric 30,988 7,000 Kokusai Kogyo Co Ltd 58,000 1,000 Komori Corp 20,880 1,000 Konami Co Ltd 28,668 2,000 Koyo Seiko Co Ltd 14,865 9,000 Kubota Corp 40,940 56,000 Kumagai Gumi Co Ltd 88,160 28,000 Kurabo Industries Ltd 70,064 1,000 Kurita Water Industries Ltd 21,129 3,000 Kyocera Corp 177,728 3,000 Kyowa Exeo Corp 23,589 3,000 Kyowa Hakko Kogyo Co Ltd 19,911 1,000 Kyudenko Corp 7,623 3,100 Kyushu Electric Power Co Inc 53,683 2,000 Kyushu Matsushita Electric 21,874 600 Mabuchi Motor Co 29,878 15,000 Maeda Corp 91,101 1,000 Makita Corp 13,754 22,000 Marui Co Ltd 315,353 1,000 Maruichi Steel Tube 15,660 4,000 Matsushita Communications 105,063 18,000 Matsushita Electric Industrial Co Ltd 277,405 23,000 Matsushita Electric Works Ltd 202,005 2,000 Matsushita Kotubuki 57,171 39,000 Mazda Motor Corp * 113,746 9,000 Meiji Seika Kaisha Ltd 43,400 15,000 Minebea Co Ltd 124,037
See accompanying notes to the financial statements. 13 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Japan - continued 4,000 Minolta Co Ltd 24,691 2,000 Misawa Homes 12,197 1,000 Mitsubishi Corp 9,280 29,000 Mitsubishi Electric Corp 162,913 16,000 Mitsubishi Gas Chemical Co Inc 58,596 16,000 Mitsubishi Oil Co Ltd 66,551 4,000 Mitsubishi Rayon Co Ltd 14,517 8,000 Mitsubishi Steel Manufacturing * 27,508 2,000 Mitsubishi Warehouse & Transportation Co Ltd 23,200 12,000 Mitsui Mining & Smelting Co Ltd 46,135 9,000 Mitsui OSK Lines * 17,897 1,000 Mochida Pharmaceutical Co Ltd 8,369 4,000 Murata Manufacturing Co Ltd 140,194 5,000 Nachi Fujikoshi Co 14,997 1,100 Namco Ltd 31,080 3,000 National House Industrial 36,291 34,000 NEC Corp 394,399 5,000 New Japan Securities Co Ltd * 15,370 12,000 New Oji Paper Co Ltd 66,816 2,000 NGK Insulators 18,229 5,000 NGK Spark Plug Co 51,371 2,000 Nichicon Corp 23,034 19,000 Nichiei Co Ltd 35,421 10,000 Nichii Co Ltd 128,428 9,000 Nihon Cement Co Ltd 42,878 9,000 Nikon Corp 131,991 6,200 Nintendo Co Ltd 437,170 15,000 Nippon Carbon Co Ltd * 41,636 2,000 Nippon Chemical 13,108 4,000 Nippon Comsys 44,080 2,000 Nippon Electric Glass Co 27,508 12,000 Nippon Express Co Ltd 77,256 2,000 Nippon Kayaku Co Ltd 11,451 2,000 Nippon Meat Packers Inc 20,051 348,000 Nippon Oil Co Ltd 1,467,661 9,000 Nippon Paper Industries 42,207 4,000 Nippon Soda Chemical Co Ltd 29,166 12,000 Nippon Suisan Kaisha Ltd * 31,916 82 Nippon Telegraph & Telephone 583,627 7,000 Nishimatsu Construction 52,200 45,000 Nissan Motor Co Ltd 265,474 1,000 Nisshinbo Industries Inc 7,209 17,000 Nissho Iwai Corp 64,090 1,000 Nissin Food Products Co Ltd 19,140 1,000 Nitsuko Corp 6,653 5,000 Nitto Boseki Co Ltd 15,370 19,000 Nitto Denko Corp 253,459 8,000 NTN Corp 39,241 22,000 Oki Electric Industry 115,933 4,000 Okuma Corp 33,143
14 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 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Japan - continued 5,000 Okumura Corp 26,431 3,000 Olympus Optical Co Ltd 25,106 4,000 Omron Corp 62,971 4,000 Ono Pharmaceutical Co Ltd 128,594 8,000 Onoda Cement Co Ltd 28,105 2,000 Orix Corp 84,514 8,000 Penta Ocean Construction 28,569 9,000 Pioneer Electronics Corp 173,751 45,000 Renown Inc * 89,485 14,000 Ricoh Co Ltd 164,720 6,000 Royal Co Ltd 101,417 6,000 Sanden Corp 48,223 6,000 Sankyo Co Ltd 167,040 1,000 Sanrio Co Ltd * 6,297 4,000 Sanwa Shutter Corp 28,934 4,000 Sapporo Breweries Ltd 29,596 2,000 Sato Kogyo Co Ltd 4,474 1,000 Secom Co Ltd 56,343 3,900 Sega Enterprises 109,222 1,000 Seiko Corp 5,957 2,000 Seino Transportation Co Ltd 19,886 2,000 Seiyu 17,234 12,000 Sekisui Chemical Co Ltd 124,285 5,000 Sekisui House Ltd 46,400 3,000 Seven-Eleven Japan 180,462 1,300 Shikoku Electric Power 22,512 7,000 Shin-Etsu Chemical Co Ltd 135,140 14,000 Shionogi and Co Ltd 87,116 29,000 Shiseido Co Ltd 338,802 3,000 Shokusan Jutaku Sogo Co Ltd * 5,046 17,000 Showa Denko 37,327 11,000 Showa Shell Sekiyu 82,119 1,000 SMC 68,026 4,000 Sony Corp 288,673 4,000 Stanley Electric Co Ltd 20,350 12,000 Sumitomo Corp 90,181 2,000 Sumitomo Electric 27,674 4,000 Sumitomo Forestry Co Ltd 45,737 3,000 Sumitomo Heavy Industries Ltd 9,048 1,000 Sumitomo Osaka Cement Co Ltd 2,734 3,000 Sumitomo Rubber Inc 19,761 2,000 Sumitomo Sitix Corp 36,623 5,000 Taisho Pharmaceutical Co Ltd 115,171 5,000 Taiyo Yuden Co Ltd 58,414 5,000 Takashimaya Co 55,100 23,000 Takeda Chemical Industries Ltd 461,182 4,000 Takuma Corp 45,406 4,000 Tanabe Seiyaku Co Ltd 29,000 6,000 TDK Corp 401,690 8,000 Teikoku Oil Co Ltd 37,650
See accompanying notes to the financial statements. 15 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Japan - continued 7,000 Terumo Corp 102,080 100 Toho Co Ltd 13,091 2,500 Tohoku Electric Power Co Inc 42,878 2,000 Tokyo Broadcasting System Inc 29,000 6,000 Tokyo Electric Co Ltd * 21,874 6,900 Tokyo Electric Power 128,064 5,000 Tokyo Steel Manufacturing Co 55,100 2,000 Tokyo Style Co Ltd 22,869 2,000 Tokyo Tatemono Co Ltd 8,700 26,000 Tokyu Construction Co Ltd 57,304 7,000 Tokyu Land Corp * 24,070 10,000 Toppan Printing Co Ltd 115,171 2,000 Toray Industries Inc 11,567 4,000 Toshiba Ceramics Co Ltd 31,154 45,000 Toshiba Corp 253,542 9,000 Toshiba Tungaloy Co Ltd 40,268 2,000 Tostem Corp 46,400 2,000 Toyo Seikan Kaisha Ltd 46,897 1,000 Toyo Suisan Kaisha 9,197 7,000 Toyo Trust & Banking Co Ltd 49,996 2,000 Toyoda Auto Loom 34,634 1,000 Toyota Motor Corp 25,603 2,000 Tsubakimoto Chain 10,423 1,000 Tsumura and Co 6,214 1,000 Unicharm Corp 25,686 1,000 Uniden Corp 10,771 1,000 UNY Co Ltd 17,649 23,000 Victor Co of Japan Ltd 219,157 7,000 Wacoal Corp 70,760 2,000 Yakult Honsha Co Ltd 20,217 10,000 Yamaha Corp 190,571 3,000 Yamaha Motor Co 25,603 143,000 Yamaichi Securities Co Ltd 495,269 10,000 Yamanouchi Pharmaceutical Co Ltd 208,799 5,000 Yamato Transport Co Ltd 49,300 2,000 Yamazaki Baking Co Ltd 29,994 1,000 Yokogawa Bridge Corp 8,451 5,000 Yokogawa Electric Corp 38,321 ------------------ 20,807,159 ------------------ Malaysia - 2.7% 12,000 Aluminum Co Malaysia 19,235 54,000 Amalgamated Steel Mills Berhad 47,845 10,100 AMMB Holdings Berhad 95,183 20,000 Aokam Perdana Berhad * 43,093 13,000 Arab Malaysian Finance (Foreign Registered) 90,576 76,000 Berjaya Group 105,904 40,000 Berjaya Industrial Berhad 64,116 43,000 Berjaya Leisure Berhad 120,358
16 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 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Malaysia - continued 50,300 Berjaya Sports Toto 291,712 5,000 Carlsberg Brew Malaysia 43,093 18,000 Cement Industries of Malaysia Berhad 54,732 26,000 DMIB Berhad 30,995 24,800 Edaran Otomobil Berhad 254,692 16,000 Ekran Berhad 57,350 10,300 Esso Malaysia Berhad 28,415 400 Faber Group Berhad * 512 13,000 Genting Berhad 88,482 21,000 Golden Hope Plantations Berhad 37,890 4,000 Golden Plus Holdings 10,310 9,000 Guinness Anchor Berhad 23,198 29,000 Highlands and Lowlands Berhad 51,857 15,800 Hong Leong Industries Berhad 54,088 400 Hong Leong Industries Berhad Class A 1,369 75,000 Hong Leong Properties Berhad 138,945 6,000 Hume Industries Berhad 37,938 20,000 IJM Corp Berhad Class A 53,564 10,000 Innovest Berhad 38,059 48,000 IOI Corporation Berhad 86,605 8,000 Jaya Tiasa Holdings Berhad 43,818 15,000 Johan Holdings Berhad 16,190 12,000 Kedah Cement Berhad 23,294 7,000 Kelanamas Industries 14,801 16,000 Kemayan Corporation Berhad 24,100 6,000 Kian Joo Can Factory 28,272 19,500 Kuala Lumpur Kepong Berhad 58,901 53,200 Kumpulan Guthrie Berhad 92,559 31,000 Land & General Berhad 63,049 20,000 Landmark Berhad 35,924 44,000 Leader Universal Holdings 93,919 88,000 Magnum Corp Berhad 182,521 23,000 Malayan Cement Berhad 60,209 73,000 Malayan United Industries Berhad 66,738 12,000 Malayawata Steel 23,681 23,000 Malaysia Mining Corp Berhad 31,865 42,000 Malaysian Airline Systems 111,639 33,000 Malaysian Helicopter Berhad 46,782 58,100 Malaysian International Ship (Alien Market) 153,264 13,000 Malaysian Mosaics 22,618 8,000 Malaysian Oxygen Berhad 43,174 11,000 Malaysian Pacific Industries 45,630 10,000 Malaysian Plantations Rights 4/9/97 * 4,350 15,000 Malaysian Plantations 35,340 2,000 Matsushita Electric 19,573 37,000 MBF Capital Berhad 75,997 102,000 MBF Holdings Berhad 67,781 30,000 Mulpha International 32,622
See accompanying notes to the financial statements. 17 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Malaysia - continued 50,000 Multi Purpose Holdings 118,808 6,000 Nestle Malaysia 45,671 12,000 New Straits Times 76,359 41,900 Oriental Holdings Berhad 377,994 6,000 OYL Industries Berhad 58,478 72,100 Pan Malaysia Cement 85,951 30,000 Perlis Plantations 93,033 72,000 Pernas International Hotel & Property 88,731 83,000 Perusahaan Otomobil 548,208 6,000 Petaling Garden Berhad 10,246 24,500 Petronas Dagangan Berhad 65,616 11,000 Petronas Gas Berhad 40,093 10,000 Pilecon Engineering Berhad 18,123 14,000 PJ Development Holdings 16,182 31,000 Promet Berhad * 35,083 86,666 Public Bank Berhad (Alien Market) 202,442 124,000 Renong Berhad 225,727 44,000 Resorts World Berhad 205,558 10,000 RJ Reynolds Berhad 27,386 2,000 Rothmans of Pall Mall Malaysia Berhad 20,741 77,000 Sarawak Enterprises Corp 146,992 14,400 Shell Refinery Co 46,395 18,000 Sime Darby 20,803 36,000 Sime Darby Berhad 136,287 8,600 Sime UEP Properties Berhad 23,206 8,000 Sistem Television Malaysia 16,432 37,000 Sungei Way Holdings 107,290 41,000 TA Enterprise Berhad 65,058 142,000 Tan Chong Motor Holdings Berhad 288,804 25,000 Technology Resources Industries 58,397 29,000 Telekom Malaysia 234,756 76,000 Tenaga Nasional 364,237 24,000 Time Engineering Berhad 54,128 13,000 Tractors Malaysia Holdings Berhad 27,225 45,000 UMW Holdings Berhad 237,414 9,000 Uniphone Telecommunications 12,541 19,000 Westmont Industries Berhad 38,643 27,000 YTL Corp 156,585 ------------------ 7,884,350 ------------------ Netherlands - 0.6% 1,000 Elsevier NV 16,010 622 ING Groep NV 24,077 1,250 Kon Bolswessanen 21,922 4,200 Royal Dutch Petroleum Co ADR 726,600 5,800 Unilever NV 1,104,900 ------------------ 1,893,509 ------------------ New Zealand - 0.0% 276 Brierley Investment Ltd 265 ------------------
18 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 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Norway - 0.9% 51,400 Norsk Hydro AS 2,574,348 ------------------ Singapore - 2.2% 120,500 Chuan Hup Holdings Ltd 92,952 276,000 DBS Land Ltd 1,074,194 136,000 First Capital Corp Ltd 408,191 21,800 Fraser and Neave Ltd 195,680 12,000 Golden Hope Plantations Berhad 21,795 240,000 Hai Sun Hup Group Ltd 178,401 102,000 Haw Par Brothers International Ltd 237,475 140 Haw Par Brothers International Ltd Warrants 7/18/2001 * 135 135,000 Hotel Properties Ltd 238,569 48,000 Inchcape Berhad 167,630 655,250 Jardine Strategic Holdings Ltd 2,149,220 7,000 Prima Ltd 24,348 33,000 Robinson and Co Ltd 135,379 84,000 Singapore Airlines Ltd 742,216 133,000 Straits Trading Co Ltd 328,303 21,000 Times Publishing Ltd 46,830 13,000 United Engineers 22,518 522,000 United Industrial Corp Ltd 450,252 30,000 Wearne Brothers Ltd 82,048 ------------------ 6,596,136 ------------------ Spain - 2.4% 24,290 Argentaria Corporacion Bancaria de Espana SA 972,617 39,580 Banco Bilbao Vizcaya SA 2,333,108 35,840 Banco Central Hispanoamericano SA 950,066 206,630 FENOSA SA 1,636,031 37,352 Fuerzas Electricas de Cataluna SA 298,347 42,580 Iberdrola SA 464,860 47,421 Sevillana de Electricidad 430,047 2,750 Tableros Defibras Class B 26,570 ------------------ 7,111,646 ------------------ Sweden - 2.0% 2,606 Assi Doman 67,599 1,500 Autoliv AB 68,217 4,800 Avesta Sheffield AB 48,652 15,500 Bilspedition AB Class B * 57,675 5,105 Celsius Industrier AB Class B 98,381 600 Custos AB Series Class B 13,884 10,800 Electrolux AB Class B 675,531 15,100 Ericsson LM Class B 480,302 2,614 Esselte AB Class A 63,275 1,800 Esselte AB Class B 43,691 1,288 Euroc Industri AB Class A 47,926 34 Fastighets AB (Hufvudstaden) Class A 252 1,400 Hennes and Mauritz AB Class B 199,037 630 Industrivarden AB Class A 31,676
See accompanying notes to the financial statements. 19 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- Sweden - continued 316 Industrivarden AB Class C (Bearer) 15,172 2,400 Kinnevik Investment Class B 68,017 3,900 Marieberg Tidnings AB Class A 108,187 18,000 Mo Och Domsjo AB Class B 571,345 5,200 Nordbanken 188,634 700 Skandia Group Foersaekrings AB 21,285 30,540 Skandinaviska Enskilda Banken Class A 321,770 17,106 Skanska AB Class B 755,136 2,000 SKF AB Class B 47,745 16,200 Sparbanken Sverige AB Class A 319,761 7,300 Ssab Swedish Steel Class A 124,131 2,400 Ssab Swedish Steel Class B 40,810 12,019 Stena Line AB Class B 57,065 31,700 Stora Kopparberg Bergslags Class A 433,343 5,600 Stora Kopparberg Bergslags Class B 75,806 611 Svedala Industries 11,979 23,400 Svenska Cellulosa Class B 519,612 6,100 Svenska Handelsbanken Class A 170,843 400 Svenska Kullagerfabriken AB 9,442 11,000 Trelleborg AB Class B 172,377 94 Trygg Hansa Holdings AB Class B 1,981 750 Volvo AB Class A 18,655 3,700 Volvo AB Class B 92,770 ------------------ 6,041,964 ------------------ Switzerland - 0.0% 214 Banque Cantonale Vaudoise (Bearer) 52,666 1,100 Biochem Pharma Inc * 58,344 ------------------ 111,010 ------------------ United Kingdom - 12.4% 6,500 3 Group Plc 53,978 9,900 Allied Colloids 20,755 69,700 Allied Domecq Plc 495,231 52,051 AMEC 101,056 3,670 Amersham International 77,539 24,070 Amstrad Plc 75,006 19,300 Anglian Water Plc 204,042 6,533 Argos Plc 73,118 45,000 Arjo Wiggins Appleton Plc 118,936 717,600 ASDA Group 1,311,256 9,900 Ashley (Laura) Holdings 25,439 38,600 Associated British Foods 306,063 11,900 Associated British Ports Holding Ltd 60,866 5,900 Astec (BSR) 13,861 57,200 Bank of Scotland 318,694 34,730 Barratt Development 157,237 105,010 Bass 1,464,819 8,200 BAT Industries 71,841 3,000 BBA Group 16,788
See accompanying notes to the financial statements. 20 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- United Kingdom - continued 32,700 Beazer Holmes Plc 106,700 3,700 Berisford International 8,270 633,100 BG Plc 1,761,099 4,527 BICC 20,385 12,400 Blue Circle Industries 80,619 12,370 Booker Plc 69,223 16,000 BPB Industries Plc 89,276 26,270 British Aerospace 546,566 22,818 British Airways 234,720 4,800 British Land Co 41,897 104,000 British Petroleum 1,152,948 126,300 British Steel 309,088 377,800 British Telecom Plc 2,623,255 34,200 BTR 134,193 2,538 Bunzl Co 8,716 6,230 Burmah Castrol Plc 105,098 197,640 Burton Group 504,634 21,300 Caradon 94,870 3,020 Carlton Communications 25,720 633,100 Centrica Plc * 676,551 40 Charter Plc (Registered) 482 1,400 Chubb Security 9,753 87,699 Coats Viyella 184,574 800 Cobham Group Plc 7,655 44,427 Cookson Group 169,609 15,700 Cordiant Plc * 25,038 8,600 Costain Group (b) 6,314 8,000 Courtaulds 47,509 13,100 Courtaulds Textiles Plc 53,004 9,000 Dalgety Plc 48,162 41,164 Dawson International 46,340 7,600 Delta 43,522 19,400 Electrocomponents Plc 127,079 731 Energy Group Plc * 6,226 63,261 English China Clays Plc 220,870 58,000 Enterprise Oil 588,580 98,700 Eurotunnel SA Units (Registered) * 122,382 12,500 FKI 38,136 2,800 General Electric 17,039 12,890 Glaxo Wellcome Plc 218,502 7,670 Granada Group 115,626 127 Grand Metropolitan 943 7,490 Great Portland Estates Plc 25,784 23,582 Greenalls Group Plc 214,685 3,900 Greycoat Plc 10,181 100 Guinness 747 3,600 Hambros 15,271 954 Hammerson 6,817
See accompanying notes to the financial statements. 21 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- United Kingdom - continued 914 Hanson Plc 4,101 42,800 Harrisons & Crosfield 92,173 32,093 Hazlewood Foods 62,308 1,300 Hepworth 5,557 90,472 Hillsdown Holdings 281,926 8,500 Hyder Plc 115,102 1,000 Imperial Chemical Industries Plc 12,350 731 Imperial Tobacco Group Plc * 5,069 751 Inchcape 3,259 39,600 Kingfisher 437,392 8,060 Kwik Save Group 40,173 313,735 Ladbroke Group 1,177,275 6,500 Laing (John) 32,132 800 Laporte Plc 8,392 270,300 Lasmo 1,062,797 72,425 Legal & General Group 462,011 7,900 Lex Service 44,982 45,000 Lloyds TSB Group 374,429 36,300 London International 98,903 173,465 Lonrho 407,532 29,483 Lucas Variety Plc * 98,368 44,209 Marley 89,437 15,500 Meggitt 26,806 4,190 Mercury Asset Management 92,149 13,400 Meyer International 87,886 23,400 MFI Furniture Group 74,827 104 Millennium Chemicals Inc 1,989 81,791 Mirror Group Plc 279,561 11,901 National Grid Holdings Plc 40,192 137,860 National Power 1,104,913 14,300 Next 138,816 2,974 NFC Plc 8,346 45,254 Norcros Plc 67,925 23,400 Northern Foods Plc 81,317 10,360 Ocean Group 79,356 82,500 Orange Plc 285,349 135,300 Peninsular & Oriental Steam Navigation Co 1,472,349 196,349 Pilkington 464,498 2,300 Powell Duffryn 15,310 29,698 Powergen 299,435 3,100 Premier Farnell Plc 24,934 42 Racal Electronics 199 17,200 Railtrack Group Plc 126,980 15,012 Reckitt & Colman 195,202 22,733 Redland 129,069 53,300 Rentokil Plc 392,185 56,500 Reuters Holdings 605,621 400 RMC Group 6,216 36,798 Rolls-Royce 139,283 1,404 Royal & Sun Alliance Insurance 11,270
22 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 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- United Kingdom - continued 19,700 Rugby Group 35,033 9,689 Safeway Plc 57,224 4,200 Sainsbury (J) 21,174 1,300 Salvesen (Christian) 6,798 34,300 Scottish Hydro-Electric Plc 199,219 101,954 Scottish Power Plc 582,183 10,600 Scottish & Newcastle Plc 117,080 252,900 Sears 334,211 13,700 Securicor Plc 69,960 6,300 Sedgwick Group 12,951 18,461 Severn Trent Plc 214,749 10,013 Shell Transport & Trading (Registered) 169,733 16,470 Siebe Plc 260,109 58,591 Signet Group Plc * 30,589 44,966 Simon Engineering 30,812 3,900 Slough Estates 18,070 7,501 Smith & Nephew Plc 23,619 47,317 Smithkline Beecham Plc 707,903 2,930 Smiths Industries 36,904 21,400 Southern Electric Plc 276,520 7,600 Southwest Water 85,060 44,710 Storehouse Plc 199,868 108,144 T & N 287,592 349,530 Tarmac 575,961 5,400 Tate & Lyle 38,456 94,900 Taylor Woodrow Plc 295,724 126,439 Tesco 697,244 31,800 Thames Water 356,427 1,200 Thistle Hotels Plc * 4,033 8,200 TI Group Plc 70,504 52,380 Tomkins Plc 243,555 21,700 Transport Development Group 72,577 5,100 Unigate 38,025 11,480 Unilever Plc 295,272 67,816 United Biscuits 265,540 4,500 United News & Media Plc 51,980 86,500 United Utilities 935,657 5,300 Vendome Luxury Group Plc Units 45,483 9,200 Vickers 40,526 25,920 Vodafone Group Plc 123,059 21,900 Waste Management International * 84,322 23,321 Wessex Water Plc 136,974 64,460 Whitbread Plc Class A 826,609 7,000 Willis Corroon Group Plc 17,473 29,616 Wilson (Connolly) Holdings 75,860 105,800 Wimpey (George) 243,384 1,711 Wolseley 13,148 11,900 Yorkshire Electricity Group 173,375 11,700 Yorkshire Water 137,247 ------------------ 36,734,610 ------------------
See accompanying notes to the financial statements. 23 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- United States - 30.7% 900 3 Com Corp * 29,798 31,900 Abbott Laboratories 1,794,375 3,400 Advanced Micro Devices * 121,975 2,900 AES Corp * 189,588 3,500 Aetna Inc 290,063 3,550 AFLAC I 143,331 14,500 Albertson's Inc 511,125 8,100 Allegheny Power System 248,063 5,100 Allegheny Teledyne Corp 130,050 600 Allergan Inc 20,400 6,300 Allstate Corp 399,263 1,700 Ambac Corp 113,475 12,500 American Electric Power 521,875 1,100 American General Corp 47,713 17,500 American Home Products 1,120,000 7,500 American Stores Co 335,625 3,700 Amsouth Bancorporation 189,625 34,300 Anheuser-Busch Cos, Inc 1,526,350 5,700 Apache Corp 184,538 26,660 Archer Daniels Midland 493,210 28,700 AT & T Corp 1,144,413 5,800 Atlantic Richfield Co 725,000 2,600 Avnet Inc 162,500 3,400 Baker Hughes 120,700 11,700 Baltimore Gas & Electric Co 321,750 300 Bandag Inc 14,625 14,100 Bank of Boston Corp 1,062,788 13,900 Bank of New York Co, Inc 538,625 6,500 Bankers Trust New York Corp 589,875 12,700 Barnett Banks Inc 587,375 9,518 Bear Stearns Co Inc 285,540 600 Becton Dickinson & Co 29,550 4,200 Bell Atlantic Corp 290,325 700 Bellsouth Corp 32,813 2,700 Beneficial Corp 186,638 400 BHC Communications Inc Class A 40,800 25,100 Bristol-Myers Squibb Co 3,275,550 14,500 Burlington Northern Santa Fe Corp 1,207,125 2,800 Burlington Resources Inc 122,850 1,700 Cabletron Systems Inc * 51,000 8,800 Callaway Golf Company 280,500 400 Cardinal Health 24,600 5,700 Carolina Power & Light Co 211,613 19,300 Central & South West Corp 470,438 2,700 Champion International 119,138 23,156 Chase Manhattan Corp 2,318,495 7,500 Chevron Corp 483,750 27,000 Chrysler Corp 914,625
See accompanying notes to the financial statements. 24 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- United States - continued 1,300 Cigna Corp 198,738 1,200 Cincinnati Bell Inc 74,400 15,900 Cinergy Corp 548,550 300 Circus Circus Enterprises Inc * 9,375 9,800 Cisco Systems Inc * 545,125 3,200 Citicorp 373,600 2,800 Citizens Utilities B 33,250 3,600 Clorox Co 430,200 7,200 CMS Energy Corp 235,800 800 CNA Financial Corp * 89,000 3,600 Coastal Corp 163,800 33,300 Coca Cola Co 2,031,300 3,700 Coca Cola Enterprises Inc 228,475 7,500 Columbia Gas Systems 440,625 800 Columbia HCA Healthcare Corp 33,600 1,000 Comdisco Inc 31,125 13,200 Compaq Computer Corp * 1,046,100 8,100 Computer Associates International Inc 352,350 14,800 Conseco Inc 580,900 2,000 Cooper Industries Inc 88,500 7,800 Corning Incorporated 293,475 4,000 Countrywide Credit Industries Inc 116,500 13,100 CPC International 1,102,038 4,900 CSX Corp 226,013 8,900 CVS Corp 411,625 17,900 Dayton Hudson Corp 751,800 1,500 Dean Foods Co 48,938 12,000 Dean Witter Discover & Co 460,500 7,300 Dell Computer Corp * 519,213 8,000 Dillard Department Stores Class A 241,000 2,900 Dominion Resources Inc 116,725 8,300 DPL Inc 204,388 6,100 DQE Inc 180,713 12,900 Duke Power Co 570,825 3,000 Eastman Chemical 165,375 29,700 Edison International 638,550 2,000 Edwards (AG) Inc 71,000 2,600 Enova Corp 58,175 1,700 Ensco International Inc * 73,738 29,400 Entergy Corp 775,425 500 Equifax Inc 14,875 9,200 Exxon Corp 918,850 1,900 F M C Corp * 130,625 100 Fina Inc Cl A 6,238 1,300 First Chicago NBD Corp 76,050 6,800 Fleet Financial Group Inc 414,800 200 Fleming Co 3,500 35,600 Ford Motor Co 1,170,350
See accompanying notes to the financial statements. 25 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- United States - continued 4,400 Fruit of The Loom Class A * 179,850 7,700 Gap Inc 254,100 16,800 General Electric Co 1,728,300 20,300 General Motors Corp 1,174,863 3,100 Gillette Co 245,288 10,100 Global Marine Inc * 188,113 2,400 Golden West Financial Corp 162,600 3,400 Goodyear Tire & Rubber Co 179,350 900 Grainger (WW) Inc 71,325 14,900 Great Western Financial Corp 653,738 2,400 Greenpoint Financial Corp 144,000 9,700 GTE Corp 453,475 4,600 Harley-Davidson 171,925 900 Hasbro Inc 38,475 1,400 HBO and Co 80,675 11,500 HF Ahmanson 472,938 1,400 Hillenbrand Industries Inc 52,675 3,900 Home Depot Inc 212,550 1,600 Hormel Foods Corp 42,000 1,500 Household International Inc 145,313 18,400 Houston Industries Inc 427,800 5,600 IBP Inc 130,200 8,200 Illinova Corp 205,000 15,700 Intel Corp 2,227,438 7,800 International Business Machines Corp 1,121,250 5,700 International Game Technology 99,750 11,900 International Paper Co 496,825 5,700 Johnson & Johnson 328,463 44,200 K Mart Corp * 552,500 2,400 Leggett & Platt Inc 86,100 4,000 Lehman Brothers Holdings Inc 134,500 3,700 LG&E Energy Corp 91,575 6,300 Lilly (Eli) and Co 550,463 4,900 Lincoln National Corp 284,813 1,500 Litton Industries Inc * 64,500 3,500 Liz Claiborne 141,750 7,200 Loews Corp 735,300 9,800 Long Island Lighting 225,400 4,200 May Department Stores 195,825 2,100 MBIA Inc 205,013 8,200 MCI Communications Corp 293,150 200 McKesson Corp 13,250 3,400 Mead Corp 198,050 7,000 Mellon Bank Corp 562,625 11,300 Merck & Co 1,039,600 4,500 Merrill Lynch & Co 432,000 21,400 Microsoft Corp * 2,086,500 1,100 Mobil Corp 135,025
26 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 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- United States - continued 8,700 Monsanto Co 316,463 2,000 Morgan Stanley Group Inc 126,250 800 Murphy Oil Corp 37,100 6,300 New York State Electric & Gas Corp 146,475 1,800 Newell Co 66,825 3,700 Nike Inc Class B 265,938 1,100 Noble Affiliates Inc 42,900 5,300 Noble Drilling Corp 94,075 800 Noram Energy Corp 12,000 3,100 Northern States Power 147,638 400 Northern Telecommunications 28,750 9,100 Nynex Corp 468,650 5,900 Occidental Petroleum Corp 150,450 3,150 Old Republic International Corp 85,444 8,200 Oracle Systems Corp * 321,850 2,000 Oryx Energy Co * 40,000 30,400 Pacific Telesis Group 1,238,800 17,500 PacifiCorp 360,938 1,600 Paine Webber Group Inc 52,200 8,200 Penney (J C) Co 403,850 2,400 Pennzoil Co 137,700 7,800 Pepsico Inc 256,425 4,100 Pfizer Inc 375,663 18,900 Pharmacia & Upjohn Inc 696,938 3,000 Phelps Dodge Corp 214,500 6,600 Philip Morris Co Inc 891,825 12,400 Phillips Petroleum Co 513,050 1,800 Pitney Bowes 111,825 24,300 PNC Bank Corp 1,029,713 5,500 Portland General Corp 215,188 6,100 Potomac Electric Power Co 154,788 4,000 PP&L Resources 91,500 700 Praxair 34,038 7,800 Procter & Gamble Co 936,975 1,500 Progressive Corp 99,188 900 Provident Companies Inc 49,050 6,400 Providian Corp 357,600 3,100 Public Service of Colorado 120,900 700 Raychem Corp 59,588 11,700 Raytheon Co 551,363 4,300 Reebok International Ltd 201,025 100 Reliastar Financial Corp 6,200 1,200 Reynolds & Reynolds Co Class A 33,600 1,100 RJR Nabisco Holdings Corp 40,288 500 Robert Half International * 20,813 5,400 Ryder Systems Corp 170,100 6,600 SAFECO Corp 275,550 6,400 Safeway Inc * 308,000
See accompanying notes to the financial statements. 27 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- United States - continued 10,800 Salomon Inc 600,750 17,400 Sara Lee Corp 674,250 4,200 Scana Corp 109,725 4,600 Schering-Plough Corp 352,475 4,400 Schlumberger Ltd 442,750 300 Seagate Technology * 14,175 4,700 Seagram Ltd 183,300 11,700 Sonat Inc 538,200 2,100 Sonoco Products Co 55,125 57,700 Southern Co 1,254,975 3,000 Southern National Corp 116,625 22,700 Sprint Corp 1,032,850 7,900 St Paul Cos 533,250 2,300 Sterling Software * 65,838 10,200 Storage Technology Corp * 425,850 2,600 Student Loan Marketing 275,275 4,700 Summit Bancorp 224,425 1,600 SunAmerica Inc 73,400 3,400 Supervalu Inc 105,400 2,100 Synovus Financial Corp 73,238 5,700 Teco Energy Inc 138,938 5,600 Tellabs Inc * 223,300 4,700 Temple Inland Inc 259,088 16,100 Tenet Healthcare Corp * 436,713 13,500 Texaco Inc 1,334,813 14,600 Texas Utilities 589,475 2,500 TJX Cos Inc 104,375 2,500 Torchmark Corp 147,188 3,600 Tosco Corp 100,350 14,900 Toys R Us Inc * 387,400 3,800 Transamerica Corp 332,975 12,200 Travelers Corp 654,225 8,100 TRW Inc 424,238 4,300 Tyco International 253,700 8,300 Union Carbide Corp 392,175 4,800 United States Surgical Corp 204,600 1,600 United Technologies Corp 120,400 400 Universal Foods Corp 13,800 13,300 Unocal Corp 513,713 6,200 US Bancorp 306,125 400 Us Life Insurance Co 19,050 5,600 US West Inc 201,600 1,800 USX-Marathon Group 47,925 5,100 USX-US Steel Group 160,013 3,300 V F Corporation 229,350 200 Vulcan Materials 12,950 14,400 Wal Mart Stores Inc 379,800 10,700 Warner Lambert 898,800 900 Wellpoint Health Networks Inc * 38,588 1,100 Western Digital Corp * 64,900
28 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 28, 1997
Shares Description Value ($) - ---------------------------------------------------------------------------------------------------------------------- United States - continued 7,400 Westvaco Corp 218,300 5,400 Wheelabrator Technologies Inc 76,950 4,600 Whitman Corp 108,100 500 Willamette Industries 32,000 8,600 Wisconsin Energy Corp 220,375 500 Wrigley (William) Jr Co 29,938 9,200 Xerox Corp 575,000 ------------------ 90,798,873 ------------------ TOTAL STOCK AND EQUIVALENTS (Cost $217,602,380) 236,589,045 ------------------ Par Value($)/ DEBT OBLIGATIONS - 8.4% Shares U.S. Government Agency - 1.7% $ 5,000,000 Student Loan Marketing Association, 6.05% due 10/26/09 5,021,875 ------------------ U.S. Government - 6.7% $ 20,000,000 U.S. Treasury Note, 5.50% due 11/15/98 (a) 19,840,625 ------------------ TOTAL DEBT OBLIGATIONS (Cost $24,889,266) 24,862,500 ------------------ SHORT-TERM INVESTMENTS - 14.1% Cash Equivalents - 12.5% $ 15,200,000 First National Bank of Chicago Time Deposit, 5.44% due 3/3/97 15,200,000 $ 13,500,000 Republic Bank of New York Time Deposit, 5.34% due 3/3/97 13,500,000 8,626,700 The Boston Global Investment Trust (c) 8,626,700 ------------------ 37,326,700 ------------------ U.S. Government - 1.6% $ 4,850,000 U.S. Treasury Bill, 5.56% due 1/8/98 4,628,356 ------------------ TOTAL SHORT-TERM INVESTMENTS (Cost $41,955,445) 41,955,056 ------------------ Principal Amount (000's Omitted) CALL OPTION PURCHASED - 1.4% United States - 1.4% $ 300,000 U.S. Treasury Note 5.50%, Expires 04/25/97, Strike 99.00 (Cost $4,828,125) 4,218,750 ------------------ TOTAL INVESTMENTS - 103.7% (Cost $289,275,216) * * 307,625,351 Other Assets and Liabilities (net) - (3.7%) (10,923,399) ------------------ TOTAL NET ASSETS - 100.0% $ 296,701,952 ==================
Notes to the Schedule of Investments: ADR American Depositary Receipt (a) All or a portion of this security is held as collateral for open futures contracts. (b) Valued by management (Note 1). (c) Represents investment of security lending collateral (Note 1). * Non-income producing security. A dividend has not been declared for the year ended February 28, 1997. * * The aggregate identified cost for federal income tax purposes is $289,556,176, resulting in gross unrealized appreciation and depreciation of $27,413,492 and $9,344,317, respectively, and net unrealized appreciation of $18,069,175. See accompanying notes to the financial statements. 29 GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997 - -------------------------------------------------------------------------------- At February 28, 1997, industry sector diversification of the Fund's equity investments was as follows:
Industry Sector (Unaudited) Banking 8.2% Conglomerates 7.1 Services 6.4 Utilities 5.8 Real Estate 5.7 Construction 5.4 Oil and Gas 5.4 Consumer Goods 5.0 Chemicals 4.7 Retail Trade 4.6 Telecommunications 4.2 Health Care 4.0 Machinery 4.0 Electronic Equipment 3.9 Transportation 3.4 Food and Beverage 3.2 Automotive 2.6 Communications 2.2 Insurance 2.1 Paper and Allied Products 2.1 Metals and Mining 2.1 Financial Services 1.2 Aerospace 1.1 Textiles 0.7 Computers 0.7 Miscellaneous 4.2 -------- 100.0% ========
30 See accompanying notes to the financial statements. GMO Global Hedged Equity Fund (A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1997 - ---------------------------------------------------------------------------------------------------------------------------- Assets: Investments, at value (cost $289,275,216) (Note 1) $ 307,625,351 Foreign currency, at value (cost $3,091,434) (Note 1) 3,054,895 Cash 82,669 Receivable for investments sold 1,256,207 Receivable for daily variation margin on open futures contracts 416,687 Dividends and interest receivable 692,559 Receivable for open forward foreign currency contracts (Note 6) 2,867,191 Foreign withholding taxes receivable 147,308 Receivable for expenses waived or borne by Manager (Note 2) 47,494 ---------------- Total assets 316,190,361 ---------------- Liabilities: Payable for open swap contracts 4,353,890 Payable upon return of securities loaned (Note 1) 8,626,700 Payable for investments purchased 2,625,354 Payable for Fund shares repurchased 80,000 Payable for open forward foreign currency contracts (Note 6) 3,381,786 Payable to affiliate for (Note 2): Management fee 148,701 Shareholder service fee 34,304 Accrued expenses 237,674 ---------------- Total liabilities 19,488,409 ---------------- Net assets $ 296,701,952 ================ Net assets consist of: Paid-in capital $ 279,467,411 Distributions in excess of net investment income (927,940) Accumulated net realized gain 7,873,611 Net unrealized appreciation 10,288,870 ---------------- $ 296,701,952 ================ Net assets attributable to Class III Shares $ 296,701,952 =============== Shares outstanding - Class III 27,760,589 =============== Net asset value per share - Class III $ 10.69 ===============
See accompanying notes to the financial statements. 31 GMO Global Hedged Equity Fund (A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1997 - -------------------------------------------------------------------------------- Investment income: Dividends (net of foreign tax expense of $497,842) $ 7,068,302 Interest (including security lending income of $29,203) 2,607,955 --------------- Total income 9,676,257 --------------- Expenses: Management fee (Note 2) 2,168,233 Custodian fees 811,557 Audit fees 69,917 Legal fees 64,518 Stamp duties and transfer taxes 56,886 Transfer agent fees 29,537 Registration fees 3,815 Trustees fee (Note 2) 1,689 Miscellaneous 4,612 Fees waived or borne by Manager (Note 2) (531,673) --------------- 2,679,091 Shareholder service fee - Class III (Note 2) 357,586 --------------- Net expenses 3,036,677 --------------- Net investment income 6,639,580 --------------- Realized and unrealized gain (loss): Net realized gain (loss) on: Investments 47,791,902 Closed futures contracts (17,102,626) Closed swap contracts (6,769,213) Foreign currency, forward contracts and foreign currency related transactions (2,316,993) --------------- Net realized gain 21,603,070 --------------- Change in net unrealized appreciation (depreciation) on: Investments (15,992,478) Open futures contracts (3,710,557) Open swap contracts (1,332,685) Foreign currency, forward contracts and foreign currency related transactions (561,670) --------------- Net unrealized loss (21,597,390) --------------- Net realized and unrealized gain 5,680 --------------- Net increase in net assets resulting from operations $ 6,645,260 ===============
32 See accompanying notes to the financial statements. GMO Global Hedged Equity Fund (A Series of GMO Trust) Statement of Changes in Net Assets - --------------------------------------------------------------------------------
Year Ended February 28, 1997 February 29, 1996 ----------------- ------------------ Increase (decrease) in net assets: Operations: Net investment income $ 6,639,580 $ 7,767,235 Net realized gain (loss) 21,603,070 (16,123,360) Change in net unrealized appreciation (depreciation) (21,597,390) 31,582,518 ---------------- ----------------- Net increase in net assets resulting from operations 6,645,260 23,226,393 ---------------- ----------------- Distributions to shareholders from: Net investment income - Class III (5,664,462) (8,135,996) ---------------- ----------------- Net share transactions - Class III (Note 5) (87,212,602) 153,205,238 ---------------- ----------------- Total increase (decrease) in net assets (86,231,804) 168,295,635 Net assets: Beginning of period 382,933,756 214,638,121 ---------------- ----------------- End of period (including distributions in excess of net investment income of $927,940 and accumulated undistributed net investment income of $298,205, respectively) $ 296,701,952 $ 382,933,756 ================ =================
See accompanying notes to the financial statements. 33 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, --------------------------------------------------------------- 1997 1996 1995* ---------------- ---------------- ---------------- Net asset value, beginning of period $ 10.64 $ 10.12 $ 10.00 ---------------- ---------------- ---------------- Income from investment operations: Net investment income 0.24 0.21 0.11 Net realized and unrealized gain (loss) on investments 0.01 0.55 0.08 ---------------- ---------------- ---------------- Total from investment operations 0.25 0.76 0.19 ---------------- ---------------- ---------------- Less distributions to shareholders: From net investment income (0.20) (0.24) (0.07) ---------------- ---------------- ---------------- Net asset value, end of period $ 10.69 $ 10.64 $ 10.12 ================ ================ ================ Total Return (a) 2.34% 7.54% 1.92% Ratios/Supplemental Data: Net assets, end of period (000's) $296,702 $382,934 $214,638 Net expenses to average daily net assets 0.91%(c) 0.78% 0.92%** Net investment income to average daily net assets 1.99% 2.44% 2.85%** Portfolio turnover rate 463% 214% 194% Average broker commission rate (b) $ 0.084 N/A N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.02 $ 0.005 $ 0.006
* Period from July 29, 1994 (commencement of operations) to February 28, 1995. ** 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) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. The average broker commission rate will vary depending on the markets in which trades are executed. (c) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .02% of average daily net assets. 34 See accompanying notes to the financial statements. GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1997 - -------------------------------------------------------------------------------- 1. Significant accounting policies The GMO Global Hedged Equity Fund (the "Fund"), which commenced operations on July 29, 1994, 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 into classes. The Fund seeks total return consistent with minimal exposure to general equity market risk. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. At February 28, 1997, Class III was the only active class of shares of the Fund. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 35 GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 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 net exchange gains and losses on disposition of foreign currencies, 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 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 specified price 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 purchase of 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 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 held as of February 28, 1997. 36 GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 28, 1997. Options The Fund may write call and put options on securities it owns or in which it may invest. 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 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 securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price 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. As of February 28, 1997, there were no outstanding written options. The Fund may also purchase put and call options. 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. The risk associated with purchasing put and call options is limited to the premium paid. 37 GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return based on a notional amount. 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, 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 is 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 open swap agreements as of February 28, 1997. 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 28, 1997, the Fund loaned securities having a market value of $8,095,505 collateralized by cash in the amount of $8,626,700, 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. 38 GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to the differing treatments for foreign currency and passive foreign investment company transactions and swap contracts. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ------------------------- ------------------------ ------------------------ ($2,201,263) $2,205,072 ($3,809)
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. 39 GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 in such manner as deemed equitable by the Trustees, 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 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. Prior to June 1, 1996, the premium on cash purchases was .60% 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 recorded as paid-in capital by the Fund. For the year ended February 28, 1997, the Fund received $105,117 in purchase premiums and $49,502 in redemption fees. There is no premium for 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 and the possible imposition of currency exchange blockages 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. 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. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .50% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .65%; thus the net annual expense ratio after the waiver for a Class III shareholder is unchanged. 40 GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997, was $1,689. 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 28, 1997, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Proceeds ---------------- ---------------- U.S. Government securities $ 1,159,396,671 $ 1,145,884,656 Investments (non-U.S. Government 258,078,607 384,618,416 securities)
4. Principal shareholder At February 28, 1997, 33% of the outstanding shares of the Fund were held by one shareholder. 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 28, 1997 February 29, 1996 --------------------------------- -------------------------------- Class III: Shares Amount Shares Amount --------------- --------------- --------------- --------------- Shares sold 2,716,101 $ 28,751,811 18,601,167 $ 193,770,517 Shares issued to shareholders in reinvestment of distributions 335,863 3,585,825 393,253 4,125,224 Shares repurchased (11,267,323) (119,550,238) (4,235,364) (44,690,503) --------------- --------------- --------------- --------------- Net increase/ (decrease) (8,215,359) $ (87,212,602) 14,759,056 $ 153,205,238 =============== =============== =============== ===============
41 GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 6. Financial instruments A summary of outstanding financial instruments at February 28, 1997 is as follows: Futures contracts
Net Unrealized Number of Appreciation Contracts Type Expiration Date Contract Value (Depreciation) - ----------------- ----------------- ----------------- ----------------- ----------------- Buys 17 DAX March 1997 $ 3,283,793 $ 104,130 49 MIB-30 March 1997 5,028,734 429,798 113 OMX March 1997 3,094,724 (74,948) 40 TSE-35 March 1997 4,772,551 201,804 -------------- $ 660,784 ============== Sales 123 ALL ORDS March 1997 $ 5,792,803 $ (122,271) 54 CAC March 1997 4,974,146 (256,696) 26 FTSE-100 March 1997 4,544,142 (299,089) 84 HANG SENG March 1997 7,197,056 115,629 77 IBEX-35+ March 1997 2,836,672 132,018 195 S&P 500 March 1997 77,064,000 (4,021,791) 91 TOPIX March 1997 10,510,730 648,540 -------------- $ (3,803,660) ==============
At February 28, 1997, the Fund had cash and/or securities to cover any margin requirements on open futures contracts. 42 GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward currency contracts
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) - ---------------- ----------------- ------------------- -------------- --------------- Buys 5/9/97 ATS 338,585 $ 28,604 $ (902) 6/13/97 ATS 20,935,293 1,772,301 (32,699) 3/7/97 AUD 962,205 746,772 (14,073) 7/11/97 AUD 962,205 745,404 (497) 5/7/97 BEF 62,347,200 1,795,339 (60,299) 3/7/97 CAD 562,356 411,516 (478) 5/9/97 CAD 1,809,014 1,329,119 (29,567) 3/7/97 CHF 3,866,392 2,622,064 (224,597) 5/9/97 CHF 11,643,740 7,946,275 (348,204) 7/11/97 CHF 1,176,992 808,794 365 3/7/97 DEM 4,526,771 2,681,995 (286,934) 5/9/97 DEM 17,287,220 10,280,661 (415,208) 7/11/97 DEM 4,526,771 2,703,686 (1,238) 5/9/97 DKK 7,717,934 1,202,257 (38,162) 3/7/97 ESP 38,742,980 270,251 (27,749) 5/9/97 ESP 1,367,473,882 9,526,646 (431,647) 5/9/97 FIM 4,718,149 940,575 (32,292) 6/13/97 FIM 1,480,155 295,792 (7,208) 3/7/97 FRF 4,013,502 704,587 (46,148) 5/9/97 FRF 11,788,198 2,077,281 (64,859) 7/11/97 FRF 1,387,738 245,531 (111) 3/7/97 GBP 412,765 673,391 12,492 5/9/97 GBP 2,345,659 3,820,938 (52,592) 7/11/97 GBP 412,765 671,605 (583) 3/7/97 HKD 20,215,997 2,610,501 368 5/9/97 HKD 7,708,960 995,131 (1,070) 5/9/97 IEP 364,709 577,016 (7,140) 3/7/97 ITL 1,680,893,650 994,444 (99,722) 6/13/97 ITL 9,569,990,140 5,632,456 (237,544)
43 GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward currency contracts - continued
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) - ---------------- ----------------- ------------------- -------------- --------------- Buys - continued 7/11/97 ITL 1,680,893,650 $ 988,365 $ (7,750) 3/7/97 JPY 228,420,480 1,893,408 17,265 3/7/97 MYR 1,277,551 514,453 1,421 5/9/97 MYR 5,507,600 2,211,816 8,424 3/7/97 NLG 7,949,949 4,187,612 (161,502) 5/9/97 NLG 20,056,957 10,605,031 (363,150) 7/11/97 NLG 2,900,520 1,540,325 117 3/7/97 NOK 3,460,269 513,590 (23,681) 5/9/97 NOK 12,935,995 1,925,853 (86,080) 6/13/97 NOK 9,179,857 1,369,214 (46,786) 7/11/97 NOK 3,460,269 516,944 (1,736) 3/7/97 NZD 313,438 216,776 (957) 5/9/97 NZD 2,062,165 1,419,924 6,312 6/13/97 NZD 4,771,046 3,278,588 22,588 3/7/97 SEK 3,335,820 444,935 (14,833) 5/9/97 SEK 10,261,354 1,371,120 (43,441) 6/13/97 SEK 2,939,756 393,326 (5,674) 7/11/97 SEK 723,912 96,972 (1,126) 5/9/97 SGD 2,694,110 1,893,527 (33,506) --------------- $ (3,182,393) =============== Sales 5/9/97 ATS 34,205,552 $ 2,891,693 $ 105,734 3/7/97 AUD 962,205 746,772 380 5/9/97 AUD 3,960,506 3,072,798 (27,962) 5/7/97 BEF 2,432,188 70,150 2,301 3/7/97 CAD 562,356 411,516 9,819 5/9/97 CAD 1,366,565 1,004,560 20,144 7/11/97 CAD 562,356 415,025 152
44 GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward currency contracts - continued
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) - ---------------- ----------------- ------------------- -------------- --------------- Sales - continued 3/7/97 CHF 3,866,392 $ 2,622,064 $ 168,159 5/9/97 CHF 4,002,600 2,733,733 125,267 6/13/97 CHF 807,348 553,517 16,483 3/7/97 DEM 4,526,771 2,681,995 1,331 6/13/97 DEM 9,227,904 5,503,107 59,893 6/13/97 DKK 17,020,704 2,657,574 41,426 3/7/97 ESP 38,742,980 270,251 7,636 5/9/97 ESP 1,367,473,882 9,526,646 277,246 5/9/97 FIM 2,273,939 454,085 14,769 3/7/97 FRF 4,013,502 704,587 27,137 3/7/97 GBP 412,765 673,391 366 5/9/97 GBP 3,810,526 6,211,119 (35,019) 6/13/97 GBP 1,825,285 2,973,436 (6,436) 3/7/97 HKD 20,215,997 2,610,501 2,499 4/9/97 HKD 50,351,750 6,501,664 8,776 7/11/97 HKD 20,215,997 2,609,444 (693) 5/9/97 IEP 216,169 342,332 7,668 3/7/97 ITL 1,680,893,650 994,444 7,699 5/9/97 ITL 4,851,054,020 2,861,219 128,645 3/7/97 JPY 228,420,480 1,893,408 156,493 5/9/97 JPY 504,543,266 4,222,402 69,833 6/13/97 JPY 86,949,800 731,250 (13,250) 7/11/97 JPY 228,420,480 1,929,048 (19,481) 3/7/97 MYR 1,277,551 514,453 (7,025) 5/9/97 MYR 6,444,618 2,589,469 (10,930) 6/13/97 MYR 2,506,904 1,006,170 (5,170) 7/11/97 MYR 1,277,551 512,322 (1,547) 3/7/97 NLG 7,949,949 4,187,612 318,033
45 GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward currency contracts - continued
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) - ---------------- ----------------- ------------------- -------------- --------------- Sales - continued 4/9/97 NLG 3,025,890 $ 1,598,107 $ 162,155 5/9/97 NLG 14,428,952 7,636,112 315,346 7/11/97 NLG 5,049,429 2,684,115 (2,528) 3/7/97 NOK 3,460,269 513,590 1,630 5/9/97 NOK 19,368,450 2,887,357 96,306 3/7/97 NZD 313,438 216,776 1,487 5/9/97 NZD 8,127,717 5,602,110 81,825 7/11/97 NZD 313,438 215,291 824 3/7/97 SEK 3,335,820 444,935 38,759 5/9/97 SEK 65,533,118 8,764,791 452,816 7/11/97 SEK 2,611,908 350,241 1,058 5/9/97 SGD 6,414,885 4,513,393 67,744 --------------- $ 2,667,798 ===============
Currency Abbreviations ATS Austrian Schilling HKD Hong Kong Dollar AUD Australian Dollar IEP Irish Pound BEF Belgian Franc ITL Italian Lira CAD Canadian Dollar JPY Japanese Yen CHF Swiss Franc MYR Malaysian Ringgit DEM German Mark NLG Netherlands Guilder DKK Danish Krona NOK Norwegian Kroner ESP Spanish Peseta NZD New Zealand Dollar FIM Finnish Markka SEK Swedish Krona FRF French Franc SGD Singapore Dollar GBP British Pound 46 GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Swap agreements
Notional Unrealized Amount Expiration Appreciation/ Fund/Counterparty Date Description (Depreciation) - ------------------- ------------ ------------------------------------------------ ---------------- $ 20,383,440 3/15/97 Agreement with Swiss Bank Corporation dated $ (257,419) January 31, 1997 to pay (receive) the notional amount multiplied by the return on the EAFE Index (including dividends) and to receive the notional amount multiplied by LIBOR adjusted by a specified spread. 23,816,707 3/31/97 Agreement with Swiss Bank Corporation dated (219,614) January 31, 1997 to pay (receive) the notional amount multiplied by the return on the EAFE X-Japan Index (including dividends) and to receive the notional amount multiplied by LIBOR adjusted by a specified rate. 6,259,069/ 5/16/97 Agreement with Morgan Stanley Capital Services, 17,744 6,001,144 Inc. dated May 20, 1996 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 6 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 6 month LIBOR adjusted by a specified spread. 15,504,633 5/30/97 Agreement with Deutsche Bank AG dated May 31, 706,475 1996 to pay (receive) the notional amount multiplied by the return on the EAFE Index and to receive the notional amount multiplied by 6 month LIBOR adjusted by a specified spread.
47 GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Swap agreements - continued
Unrealized Notional Expiration Appreciation/ Amount Date Description (Depreciation) - ------------------- ------------ ------------------------------------------------ ---------------- $ 21,000,000 5/30/97 Agreement with Swiss Bank Corporation dated $ (2,274,814) May 31, 1996 to pay (receive) the notional amount multiplied by the return on the EAFE X-Japan Index (including dividends) and to receive the notional amount multiplied by 6 month LIBOR adjusted by a specified spread. CHF 6,956,000 8/06/97 Agreement with Swiss Bank Corporation dated 1,089,845 August 6, 1996 to pay the notional amount multiplied by 6 month LIBOR adjusted by a specified spread and to receive (pay) the notional amount multiplied by the return on the Swiss Market Index (including dividends). $ 25,000,000 8/29/97 Agreement with Deutsche Bank AG dated August 30, (2,617,737) 1996 to pay (receive) the notional amount multiplied by the return on the EAFE X-Japan Index (including dividends) and to receive the notional amount multiplied by 6 month LIBOR adjusted by a specified rate. 8,000,000 8/29/97 Agreement with Swiss Bank Corporation dated 67,252 August 30, 1996 to pay (receive) the notional amount multiplied by the return on the EAFE Index (including dividends) and to receive the notional amount multiplied by 6 month LIBOR adjusted by a specified spread.
48 GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Swap agreements - continued
Notional Unrealized Amount Expiration Appreciation/ Fund/Counterparty Date Description (Depreciation) - ------------------- ------------ ------------------------------------------------ ---------------- $ 5,826,645/ 9/11/97 Agreement with Morgan Stanley Capital $ (331,548) 5,837,283 Services, Inc. dated September 9, 1996 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 6 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 6 month LIBOR adjusted by a specified spread. 15,000,000 9/30/97 Agreement with Deutsche Bank AG dated September $ 418,332 30, 1996 to pay (receive) the notional amount multiplied by the return on the EAFE Index (including dividends) and to receive the notional amount multiplied by 6 month LIBOR adjusted by a specified spread. 15,000,000 10/07/97 Agreement with Morgan Stanley Capital Services, (952,406) Inc. dated December 23, 1996 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 6 month LIBOR adjusted by a specified spread and to receive (pay) the counterparty's notional amount multiplied by the return on the Russell 2000 Index (including dividends) less the notional amount multiplied by 6 month LIBOR adjusted by a specified spread. ---------------- Net unrealized depreciation $ (4,353,890) ================
49 GMO Global Hedged Equity Fund (A Series of GMO Trust) Federal Income Tax Information on Distributions - (Unaudited) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all the Fund's distributions are from investment company taxable income. The Fund has also elected to defer to March 1, 1997 post-October foreign currency losses of $2,765,057. 50 [THIS PAGE INTENTIONALLY LEFT BLANK] 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 ten years. Management Discussion and Analysis of Fund Performance - ------------------------------------------------------ The GMO Global Hedged Equity Fund underperformed the Salomon 3 Month T-Bill benchmark index for the fiscal year ended February 28, 1997 with the Fund returning 2.3% versus 5.2% for the Salomon 3 Month Treasury Bill. Consistent with the Fund's investment objective and policies, the Fund was invested substantially in hedged global equities, combining long positions in common stocks of the U.S. and developed international equity markets with short positions in the equity indices of the U.S. and developed international markets in order to eliminate substantially all exposure to overall equity market risk. The cash position of the fund, which ranged from 2% to 30% during the year, has been invested in fixed income securities designed to give the return of a 30 day U.S. Treasury Bill to a 2-year Treasury Note. The Fund's underperformance of the Salomon 3 Month T-Bill was principally due to the underperformance of the Fund's U.S. stock holdings relative to the S&P 500 index, which was sold short. 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 Brothers 3 Month Treasury Bill Index As of February 28, 1997
Average Annual Total Return Since Inception 1 Year 5 Year 07/29/94 Class III 0.4% N/A 3.7%
[Line Graph Appears Here]
Date GMO Global Hedged Fund Salomon Brothers 3 Month Treasury Bill Index 07/29/94 9,950 10,000 02/28/95 10,132 10,297 02/29/96 10,744 10,882 02/28/97 10,996 11,451
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. 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 140 bp on the redemption. Transaction fees are paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Class I shares and Class II shares have not commenced operations. Past performance is not indicative of future performance. Information is unaudited. GMO Domestic Bond Fund (A Series of GMO Trust) Annual Report February 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 17, 1997 GMO Domestic Bond Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Par Value Description Value ($) - ----------------------------------------------------------------------------------------------------------------------- DEBT OBLIGATIONS - 95.7% Asset Backed Securities - 40.9% $ 5,000,000 Augusta Funding Series 1996-F2, Variable Rate, LIBOR + .30% (5.89%), due 4/15/06 144A 4,951,465 11,887,168 Augusta Funding VI Series 1996-A3, 7.375% due 4/15/13 144A 11,783,039 17,000,000 Bombardier Receivables Master Trust I 97-1 Class A Variable Rate, 1 mo. LIBOR + .12% (5.56%), due 4/15/04 17,023,906 15,000,000 Chevy Chase Master Credit Card 1995-C Class A, Variable Rate, LIBOR + .26% (5.68%), due 5/15/06 15,056,250 10,000,000 Circuit City Credit Card Master Trust 1996-1 Class A, Variable Rate, LIBOR + .17% (5.59%), due 10/15/06 10,006,250 4,167,900 Dilmun Capital Corp, Variable Rate, 6 mo. LIBOR + .88% (6.42%), due 11/15/03 4,173,110 7,400,000 Discover Card Master Trust I 94-2 Class A, Variable Rate, 1 mo. LIBOR + .35% (5.77%), due 10/16/04 7,465,118 5,000,000 European Sovereign Investments, Variable Rate, 6 mo. LIBOR + .40% (6.09%), due 1/20/99 5,020,000 14,000,000 First Chicago Master Trust II 95-0 Variable Rate, 1 mo. LIBOR + .23% (5.65%), due 2/15/04 14,052,500 15,000,000 First Deposit Master Trust Series 1996-1A, Variable Rate, 1 mo. LIBOR + .17% (5.60%), due 8/15/07 15,037,500 13,500,000 First Union Master Credit Card Trust 96-1 Class A, Variable Rate, 1 mo. LIBOR + .17% (5.65%), due 9/15/03 13,536,450 7,500,000 First USA Credit Card Master Trust 94-4 Class A, Variable Rate, 1 mo. LIBOR + .37% (5.81%), due 8/15/03 7,566,225 10,050,000 Keycorp Student Loan Trust 94-B Certificates, Variable Rate, 1 mo. LIBOR + .73% (6.11%), due 11/25/21 10,050,000 10,000,000 Keycorp Student Loan Trust 95-A Class B, Variable Rate, 1 mo. LIBOR + .75% (6.19%), due 10/27/21 10,000,000 14,688,910 Keystone Auto Grantor Trust Series 1996-A Class A, 6.60% due 12/15/02 144A 14,872,521 6,000,000 National Premier Finance 95-2, 6.21% due 6/01/99 144A 5,988,000 14,000,000 National Premier Finance IX 96-1A, 7.20% due 7/01/00 14,224,000 6,000,000 Navistar Financial Dealer Note Master Trust 95-1 Class A, Variable Rate, 1 mo. LIBOR + .30% (5.74%), due 8/25/07 6,046,875 5,194,322 New York City Tax Lien Series 1996-1 Class B, 6.91% due 5/25/05 144A 5,298,208 3,500,000 Premier Auto Trust 94-4 Certificates, 6.85% due 5/02/99 3,533,110 5,000,000 Premier Auto Trust 95-1 Certificates, 8.10% due 3/04/01 5,149,219 6,652,034 Resolution Trust Corp 94-C1 Class A1, Variable Rate, 1 mo. LIBOR + .45% (5.83%), due 6/25/26 6,660,349 3,290,448 Resolution Trust Corp 94-C1 Class A3, Variable Rate, 1 mo. LIBOR + .55% (5.93%), due 6/25/26 3,294,561 2,637,000 SMS Student Loan Trust 94-B Certificates, Variable Rate, 1 mo. LIBOR + .75% (6.42%), due 10/25/23 2,637,000 4,932,000 SMS Student Loan Trust 95-A Certificates, Variable Rate, 1 mo. LIBOR + .65% (6.09%), due 4/25/25 4,925,835 5,888,000 Society Student Loan Trust 93-A Class B, Variable Rate, 1 mo. LIBOR + .75% (6.56%), due 7/25/03 5,897,200
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 28, 1997
Par Value Description Value ($) - ----------------------------------------------------------------------------------------------------------------------- Asset Backed Securities - continued $ 8,000,000 Student Loan Marketing Association Series 1996-2 Class A2, Variable Rate, 3 mo. LIBOR +.71% (5.85%), due 7/27/09 8,028,000 3,089,148 UCFC Home Equity Loan 95-B2 Class A8, Variable Rate, 1 mo. LIBOR + .45% (5.95%), due 10/10/26 3,092,237 ------------------ 235,368,928 ------------------ Structured Notes - 6.1% 2,900,000 Federal Home Loan Bank Variable Rate, (10% - 6 mo. LIBOR)(4.25%), due 3/03/98 2,842,000 3,550,000 Federal Home Loan Bank, Variable Rate, (10 YR CMT + 2.55% - 3 mo. LIBOR)(3.55%), due 7/28/98 3,345,875 3,000,000 Federal Home Loan Bank, 4.90% due 2/23/98 2,992,500 2,500,000 Federal National Mortgage Association, Variable Rate, ((.50 x 10 YR CMT) + 1.50%)(4.69%), due 2/25/98 2,462,500 1,250,000 Federal National Mortgage Association, Variable Rate, ((.50 x 2YR CMT) + 1.80%)(4.91%), due 3/10/98 1,233,750 22,500,000 Student Loan Marketing Association, Variable Rate, (10.25% - 5YR DM SWAP)(4.84%), due 3/23/98 22,027,500 ------------------ 34,904,125 ------------------ U.S. Government - 18.3% 28,000,000 U.S. Treasury Bond, 6.25% due 8/15/23 (a) 25,672,500 10,000,000 U.S. Treasury Inflation Indexed Note, 3.375% due 1/15/07 10,025,000 40,000,000 U.S. Treasury Note, 6.375% due 8/15/02 39,950,000 29,000,000 U.S. Treasury Note, 6.875% due 8/31/99 (a) 29,471,250 ------------------ 105,118,750 ------------------ U.S. Government Agency - 30.4% 5,000,000 Agency for International Development Floater (Support of C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury Bill + .40% (5.63%), due 10/01/12 4,993,750 25,000,000 Agency for International Development Floater (Support of Portugal), Variable Rate, 6 mo. LIBOR (5.59%), due 1/01/21 24,773,438 10,000,000 Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10% (5.47%), due 2/01/27 10,040,625 9,000,000 Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. LIBOR + .30% (5.58%), due 12/01/14 9,028,125 15,000,000 Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. LIBOR + .15% (5.57%), due 10/29/26 15,051,563 20,000,000 Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. LIBOR - .015% (5.66%), due 2/01/25 19,587,500 10,772,500 Agency for International Development Floater (Support of Sri Lanka), Variable Rate, 6 mo. LIBOR + .20% (5.79%), due 6/15/12 10,819,630 10,500,000 Agency for International Development Floater (Support of Zimbabwe), Variable Rate, 3 mo. U.S. Treasury Bill x 115% (5.09%), due 1/01/12 10,506,563 10,500,000 Federal National Morgage Association Aces Series 96-M3 Class A2, 7.41% due 3/25/21 10,563,000 20,000,000 Federal National Mortgage Association, 6.49% due 1/19/06 19,379,100 5,000,000 Federal National Mortgage Association, 6.73% due 11/04/02 4,935,620
2 See accompanying notes to the financial statements. GMO Domestic Bond Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Par Value ($)/Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------------- U.S. Government Agency - continued $ 15,000,000 Federal National Mortgage Association, 5.19% due 7/20/98 14,838,930 $ 20,000,000 Small Business Administration, 7.35% due 08/01/06 20,270,000 ------------------ 174,787,844 ------------------ TOTAL DEBT OBLIGATIONS (Cost $550,334,117) 550,179,647 ------------------ PREFERRED STOCK - 3.5% 20,000 Home Ownership Funding 2 Preferred 144A 13.338% 19,844,025 ------------------ TOTAL PREFERRED STOCK (Cost $20,016,160) 19,844,025 ------------------ SHORT-TERM INVESTMENTS - 14.9% Cash Equivalents - 14.8% (b) 23,839,784 American AAdvantage Money Market Fund 23,839,784 $ 25,562,761 Bank of Boston Eurodollar Time Deposit, 5.5375% due 3/3/97 25,562,761 $ 23,000,000 Harris Bank and Trust Eurodollar Time Deposit, 5.375% due 3/3/97 23,000,000 12,500,000 Merrimac Cash Fund Premium Class 12,500,000 ------------------ 84,902,545 ------------------ Repurchase Agreement - 0.1% $ 489,061 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $489,258 and an effective yield of 4.85% collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $499,372. 489,061 ------------------ TOTAL SHORT-TERM INVESTMENTS (Cost $85,391,606) 85,391,606 ------------------ TOTAL INVESTMENTS - 114.1% (Cost $655,741,883) * * 655,415,278 Other Assets and Liabilities (net) - (14.1)% (80,922,638) ------------------ TOTAL NET ASSETS - 100.0% $ 574,492,640 ==================
See accompanying notes to the financial statements. 3 GMO Domestic Bond Fund (A Series of GMO Trust) Schedule of Investment - continued (showing percentage of total net assets) February 28, 1997 - -------------------------------------------------------------------------------- Notes to the Schedule of Investments: CMT - Constant Maturity Treasury Index DM SWAP - 5 Year Deutsche Mark Constant Maturity Swap Rate (a) A portion of this security is held as collateral for open futures contracts. (b) Represents investments of security lending collateral (Note 1). Variable rates - The rates shown on variable rate notes are the current interest rates at February 28, 1997, which are subject to change based on the terms of the security. 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. ** The aggregate identified cost for federal income tax purposes is $655,741,883, resulting in gross unrealized appreciation and depreciation of $1,599,731 and $1,926,336, respectively, and net unrealized depreciation of $326,605. See accompanying notes to the financial statements. 4 GMO Domestic Bond Fund (A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1997 -------------------------------------------------------------------------------------------------------- Assets: Investments, at value (cost $655,741,883)(Note 1) $ 655,415,278 Receivable for variation margin on open futures contracts (Notes 1 and 6) 245,241 Receivable for Fund shares sold 50,000 Interest receivable 5,007,628 Receivable for expenses waived or borne by Manager (Note 2) 110,801 ------------------ Total assets 660,828,948 ------------------ Liabilities: Written options outstanding, at value (premiums $126,563) (Note 6) 117,188 Payable upon return of securities loaned (Note 1) 84,902,545 Payable for Fund shares repurchased 1,025,700 Payable to affiliate for (Note 2): Management fee 111,028 Shareholder service fee 67,004 Accrued expenses 112,843 ------------------ Total liabilities 86,336,308 ------------------ Net assets $ 574,492,640 ================== Net assets consist of: Paid-in capital $ 571,604,845 Accumulated undistributed net investment income 5,703,472 Accumulated undistributed net realized loss (489,105) Net unrealized depreciation (2,326,572) ------------------ $ 574,492,640 ================== Net assets attributable to: Class I shares $ 3,630,253 ================== Class III shares $ 570,862,387 ================== Shares outstanding: Class I 357,259 ================== Class III 56,064,794 ================== Net asset value per share: Class I $ 10.16 ================== Class III $ 10.18 ==================
See accompanying notes to the financial statements. 5 GMO Domestic Bond Fund (A Series of GMO Trust) Statement of Operations - Year Ended February 28, 1997 ----------------------------------------------------------------------------- Investment income: Interest (including securities lending income of $88,959) $ 28,485,759 ----------------- Expenses: Management fee (Note 2) 1,112,368 Custodian and transfer agent fees 77,433 Registration fees 46,913 Audit fees 44,446 Legal fees 21,352 Trustees fee (Note 2) 2,089 Miscellaneous 3,025 Fees waived or borne by Manager (Note 2) (744,230) ----------------- 563,396 Shareholder service fee (Note 2) Class I 2,058 Class III 547,675 ----------------- Net expenses 1,113,129 ----------------- Net investment income 27,372,630 ----------------- Realized and unrealized gain (loss): Net realized gain (loss) on: Investments 709,323 Closed futures contracts 275,213 ----------------- Net realized gain 984,536 ----------------- Change in net unrealized appreciation (depreciation) on: Investments (2,238,873) Open futures contracts (951,144) Written options 9,375 ----------------- Net unrealized loss (3,180,642) ----------------- Net realized and unrealized loss (2,196,106) ----------------- Net increase in net assets resulting from operations $ 25,176,524 =================
See accompanying notes to the financial statements. 6 GMO Domestic Bond Fund (A Series of GMO Trust)
Statement of Changes in Net Assets --------------------------------------------------------------------------------------------------------- Year Ended February 28, 1997 February 29, 1996 ----------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income $ 27,372,630 $ 18,427,858 Net realized gain 984,536 14,899,226 Change in net unrealized appreciation (depreciation) (3,180,642) (1,699,294) ----------------- ----------------- Net increase in net assets resulting from operations 25,176,524 31,627,790 ----------------- ----------------- Distributions to shareholders from: Net investment income Class I (17,070) - Class III (25,071,527) (16,310,249) ----------------- ----------------- Total distributions from net investment income (25,088,597) (16,310,249) ----------------- ----------------- Net realized gains Class I (1,958) - Class III (3,491,659) (11,149,215) ----------------- ----------------- Total distributions from net realized gains (3,493,617) (11,149,215) ----------------- ----------------- In excess of net realized gains Class I (878) - Class III (1,566,602) - ----------------- ----------------- Total distributions in excess of net realized gains (1,567,480) - ----------------- ----------------- (30,149,694) (27,459,464) ----------------- ----------------- Net share transactions: (Note 5) Class I 3,600,624 - Class III 264,915,841 97,403,771 ----------------- ----------------- Net increase in net assets resulting from net share transactions 268,516,465 97,403,771 ----------------- ----------------- Total increase in net assets 263,543,295 101,572,097 Net assets: Beginning of period 310,949,345 209,377,248 ----------------- ----------------- End of period (including accumulated undistributed net investment income of $5,703,472 and $3,439,616, respectively) $ 574,492,640 $ 310,949,345 ================= =================
See accompanying notes to the financial statements. 7 GMO Domestic Bond Fund (A Series of GMO Trust) Financial Highlights (For a Class I share outstanding throughout the period) - --------------------------------------------------------------------------------
Period from September 10, 1996 (commencement of operations) February 28, 1997 ------------------------------ Net asset value, beginning of period $ 10.01 ---------- Income from investment operations: Net investment income 0.36 Net realized and unrealized gain 0.13 ---------- Total from investment operations 0.49 ---------- Less distributions to shareholders: From net investment income (0.29) From net realized gains (0.03) In excess of net realized gains (0.02) ---------- Total distributions (0.34) ---------- Net asset value, end of period $ 10.16 ========== Total Return (a) 4.93% Ratios/Supplemental Data: Net assets, end of period (000's) $ 3,630 Net expenses to average daily net assets 0.38%* Net investment income to average daily net assets 5.83%* Portfolio turnover rate 25% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.01
* Annualized. (a) The total return would have been lower had certain expenses not been waived during the period shown. 8 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, --------------------------------------- 1997 1996 1995* ----------- ---------- ---------- Net asset value, beginning of period $ 10.40 $ 10.13 $ 10.00 ----------- ---------- ---------- Income from investment operations: Net investment income 0.58 0.66 0.24 Net realized and unrealized gain (loss) (0.09) 0.58 0.07 ----------- ---------- ---------- Total from investment operations 0.49 1.24 0.31 ----------- ---------- ---------- Less distributions to shareholders: From net investment income (0.60) (0.60) (0.18) From net realized gains (0.08) (0.37) 0.00 In excess of net realized gains (0.03) ----------- ---------- ---------- Total distributions (0.71) (0.97) (0.18) ----------- ---------- ---------- Net asset value, end of period $ 10.18 $ 10.40 $ 10.13 =========== ========== ========== Total Return (a) 4.93% 12.50% 3.16% Ratios/Supplemental Data: Net assets, end of period (000's) $ 570,862 $ 310,949 $ 209,377 Net expenses to average daily net assets 0.25% 0.25% 0.25%** Net investment income to average daily net assets 6.15% 6.52% 6.96%** Portfolio turnover rate 25% 70% 65% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.02 $ 0.01 $ 0.01
* For the period from August 18, 1994 (commencement of operations) to February 28, 1995. ** Annualized (a) The total returns would have been lower had certain expenses not been waived during the periods shown. See accompanying notes to the financial statements. 9 GMO Domestic Bond Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1997 - -------------------------------------------------------------------------------- 1. Significant accounting policies The 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 into classes. The Fund seeks high total return through investment in U.S. government securities and other investment grade bonds denominated in U.S. dollars while generally maintaining a portfolio duration of approximately four to six years (excluding short-term investments). On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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 investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 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. 10 GMO Domestic Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Certain investments in securities held by the Fund were valued on the basis of a price provided by a principal market maker. At February 28, 1997, the total value of these securities represented 13% of net assets. These prices may differ from the value that would have been used had a broader market for the securities existed. 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 instruments or hedge other Fund instruments. Upon purchase of 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 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 held as of February 28, 1997. Options The Fund may write call and put options on securities it owns or in which it may invest. 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 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 securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price 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. See Note 6 for a summary of open written option contracts as of February 28, 1997. 11 GMO Domestic Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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, the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. Indexed securities The Fund may also 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 certain member firms of the New York Stock Exchange. 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 28, 1997, the Fund loaned securities having a market value of $81,979,254, collateralized by cash in the amount of $84,902,545, 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. 12 GMO Domestic Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to wash sales. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital --------------------------- ------------------------ ------------------ ($20,177) $20,179 ($2)
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. 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 in such a manner as deemed equitable by the Trustees, 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 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. 13 GMO Domestic Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .10% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .25%; thus, the net annual expense ratio after the waiver for a Class III shareholder is unchanged. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997, was $2,089. 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 28, 1997, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Proceeds --------------- --------------- U.S. Government securities $ 195,887,179 $ 57,640,000 Investments (non-U.S. Government securities) 188,897,202 50,949,578
4. Principal shareholders At February 28, 1997, 100% of the outstanding Class I shares of the Fund were held by three shareholders and 63% of the oustanding Class III shares of the Fund were held by three shareholders, each holding in excess of 10% of the outstanding shares of the respective class. 14 GMO Domestic Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 September 10, 1996 (commencement of operations) to February 28, 1997 ----------------------------------------- Class I: Shares Amount ------------------ ---------------- Shares sold 385,608 $ 3,888,618 Shares issued to shareholders in 1,967 19,906 reinvestment of distributions (30,316) (307,900) Shares repurchased ------------------- ---------------- 357,259 $ 3,600,624 Net increase =================== ================
Year Ended Year Ended February 28, 1997 February 29, 1996 ----------------------------------- ---------------------------------- Class III: Shares Amount Shares Amount ---------------- --------------- -------------- --------------- Shares sold 26,591,731 $ 269,419,204 10,635,774 $ 112,856,301 Shares issued to shareholders in reinvestment of distributions 2,531,335 25,549,376 2,246,492 23,494,050 Shares repurchased (2,947,048) (30,052,739) (3,664,474) (38,946,580) ---------------- --------------- -------------- --------------- Net increase 26,176,018 $ 264,915,841 9,217,792 $ 97,403,771 ================ =============== ============== ===============
15 GMO Domestic Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 6. Financial instruments A summary of outstanding financial instruments at February 28, 1997 is as follows: Long futures contracts
Number of Net Unrealized Contracts Type Expiration Date Contract Value Depreciation - --------------- -------------------------- --------------- ---------------- -------------- 638 U.S. Treasury Bond June 1997 $ 70,459,125 $ (539,784) 989 U.S. Treasury Note 10 Yr June 1997 106,502,937 (784,198) 721 U.S. Treasury Note 5 Yr June 1997 76,257,016 (685,360) -------------- $ (2,009,342) ==============
At February 28, 1997, the Fund has sufficient cash and/or securities to cover any commitments or margin on these contracts. Written put option transaction
Principal Amount of Contracts (000's omitted) Premiums --------------- ---------- Outstanding, beginning of period - $ - Option written 30,000 126,563 Option exercised - - Option expired - - --------------- ----------- Outstanding, end of period 30,000 $ 126,563 =============== ===========
Summary of written options outstanding
Principal Amount of Contracts (000's omitted) Exercise Price Expiration Date Value ----------------- --------------- --------------- ----------- U.S. Treasury Note 30,000 $ 100.42 3/7/97 $ 117,188 ===========
16 GMO Domestic Bond Fund (A Series of GMO Trust) Federal Income Tax Information on Distributions - (Unaudited) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all the Fund's distributions are from investment company taxable income, except that the Fund has designated 14.18% of distributions as net capital gain dividends. The Fund has also elected to defer to March 1, 1997 post-October losses of $2,498,230. 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 Domestic Bond Fund returned 4.9% for the fiscal year ended February 28, 1997, as compared to 4.6% for 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 was able to add 0.4% to the return of the benchmark in spite of an across-the-board rise in U.S. interest rates during the fiscal year. Because the policy of the Fund is to match approximately the duration, or maturity risk, of the benchmark, the shift in rates did not impact adversely its relative performance. Of course the higher rate environment meant that the total return of the Fund was reduced. During the year the majority of the Fund's assets were invested in U.S. agency and asset-backed securities. These higher-yielding alternatives to U.S. Treasury securities enabled the Fund to outperform its benchmark. Because these issues tend to have short effective maturities, U.S. Treasury interest rate futures were used to maintain the Fund's interest rate exposure near that of the benchmark. At the fiscal year end approximately 41% 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 30% of the Fund was invested in U.S. government agency issues which offered higher yields than similar maturity U.S. Treasury securities. GMO believes that asset-backed securities will continue to offer attractive opportunities to enhance the yield of the Fund. The maturity exposure of the fund is managed to approximate that of the U.S. treasury market. As such, the Fund will remain exposed to capital changes resulting from shifts in U.S. interest rates. 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 28, 1997 Average Annual Total Return
Since Inception 1 Year 5 Year 08/18/94 Class III 4.9% n/a 8.1% 09/10/96 Class I n/a n/a 4.9%
[LINE GRAPH APPEARS HERE]
Date GMO Domestic Bond Fund Lehman Brothers Government Bond Index 08/18/94 10,000 10,000 02/28/95 10,315 10,366 02/29/96 11,604 11,620 02/28/97 12,176 12,149
Performance shown in net of all fees after reimbursement from the Manager. Returns and net asset values of fund investments will fluctuate, so that and 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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Performance for Class I shares may be different due to higher shareholder service fees. Class II shares have not commenced operations. Past performance in not indicative of future performance. Information is unaudited. GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Annual Report February 28, 1997 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 relaed 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibitity of the Trust's management; our responsibilty is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 22, 1997 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 28, 1997
Par Value Description Value ($) - ------------------------------------------------------------------------------------------------------------------- DEBT OBLIGATIONS - 84.7% Argentina - 0.2% USD 1,000,000 Republic of Argentina Bocon Pro 1, PIK, Variable Rate, 1 mo. Peso Deposit Rate (3.22%), due 4/01/07 1,030,000 ---------------- Australia - 1.0% GBP 2,700,000 Commonwealth Bank Australia Series EMTN, 8.125% due 12/07/06 4,526,189 ---------------- Austria - 0.9% SEK 25,000,000 Oesterreich Kontrollbank, 9.25% due 7/15/99 3,642,256 ATS 7,030,000 Republic of Austria, 7.00% due 2/14/00 639,796 ---------------- 4,282,052 ---------------- Brazil - 0.7% USD 3,906,139 Brazil Capitalization Bond, PIK, 8.00% due 4/15/14 3,093,174 ---------------- Bulgaria - 0.1% USD 1,000,000 Bulgaria FLIRB Series B, Variable Rate, Step up (2.75%), due 7/28/12 452,500 ---------------- Canada - 3.6% CAD 8,000,000 Government of Canada Real Return, 4.25% due 12/1/21 6,435,467 CAD 5,000,000 Government of Canada Real Return, 4.25% due 12/1/26 3,806,570 CAD 3,000,000 Government of Canada, 10.25% due 3/15/14 2,921,867 CAD 5,000,000 Province of Quebec, 7.50% due 12/1/03 3,892,018 ---------------- 17,055,922 ---------------- Cayman Islands - 1.3% CAD 8,000,000 Government of Canada (Cayman), 7.25% due 6/01/08 6,007,755 ---------------- Denmark - 5.8% DKK 113,800,000 Kingdom of Denmark Bullet, 7.00% due 12/15/04 18,754,921 DKK 48,800,000 Kingdom of Denmark, 8.00% due 11/15/01 8,476,711 ---------------- 27,231,632 ---------------- Ecuador - 0.3% USD 2,000,000 Republic of Ecuador Par Bond, Variable Rate, Step up (3.25%), due 2/28/25 900,000 USD 515,599 Republic of Ecuador PDI (Registered), PIK, Variable Rate, 6 mo. LIBOR + .81% (6.44%), due 2/27/15 319,672 ---------------- 1,219,672 ---------------- France - 10.1% FRF 21,000,000 Auxiliare Credit Foncier, 10.00% due 4/20/01 4,408,404 FRF 30,000,000 Auxiliare Credit Foncier, 6.25% due 3/28/03 5,565,794 SEK 30,000,000 Credit Foncier, 6.50% due 2/22/99 4,101,039 ECU 15,000,000 Government of France, 8.25% due 4/25/22 20,320,286 ECU 10,000,000 Societe Nationale des Chemins de Fer, 9.38% due 3/12/01 13,265,230 ---------------- 47,660,753 ----------------
See accompanying notes to 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 28, 1997
Par Value Description Value ($) - ------------------------------------------------------------------------------------------------------------------- Germany - 1.2% ESP 320,000,000 Deutsche Ausgleichsbank, 8.60% due 5/22/03 2,427,625 GBP 2,000,000 Deutsche Pfandbriefe Bank, 6.50% due 12/31/98 3,235,265 ---------------- 5,662,890 ---------------- Greece - 0.8% GRD 1,000,000,000 Hellenic Republic, Variable Rate, 12 mo. GTB + 1.50% (14.20%), due 9/30/03 3,932,457 ---------------- Japan - 5.5% GBP 5,300,000 Export Import Bank of Japan, 10.75% due 5/15/01 9,697,554 GBP 3,000,000 Japan Finance Corp Municipal Enterprises, 9.125% due 02/16/05 5,337,452 GBP 6,000,000 Kobe City, 9.50% due 10/20/04 10,895,157 ---------------- 25,930,163 ---------------- Jordan - 0.3% USD 1,000,000 Hashemite Kingdom of Jordan Par Bond, Variable Rate, Step up (4.00%), due 12/23/23 144A 665,000 USD 947,368 Hashemite Kingdom of Jordan PDI, Variable Rate, 6 mo. LIBOR + .81% (6.50%), due 12/23/05 890,526 ---------------- 1,555,526 ---------------- Mexico - 2.1% USD 2,500,000 Mexico Discount Bond Series A, Variable Rate, 6 mo. LIBOR + .81% (6.45%), due 12/31/19 2,290,625 FRF 54,500,000 Mexico Par Bond, 6.63% due 12/31/19 7,796,237 ---------------- 10,086,862 ---------------- New Zealand - 0.4% NZD 2,700,000 New Zealand Index Linked Bond, 4.50% due 2/15/16 1,769,611 ---------------- Spain - 2.6% ESP 821,900,000 European Investment Bank, 10.35% due 12/20/05 6,923,225 ESP 500,000,000 Government of Spain, 10.25% due 11/30/98 3,725,846 ESP 180,000,000 Government of Spain, 10.90% due 8/30/03 1,526,892 ---------------- 12,175,963 ---------------- Supranational - 3.1% JPY 440,000,000 Asian Development Bank, 5.00% due 2/5/03 4,260,005 SEK 15,000,000 International Finance Corp, 10.63% due 9/20/99 2,260,773 JPY 200,000,000 International Bank Recon and Development, 6.75% due 6/18/01 2,020,880 GBP 3,000,000 International Bank Recon and Development, 11.50% due 11/09/03 5,946,818 ---------------- 14,488,476 ---------------- Sweden - 6.9% SEK 35,000,000 Government of Sweden Index Linked Bond, 4.00% due 12/1/20 4,780,344 SEK 80,400,000 Kingdom of Sweden, 13.00% due 6/15/01 13,722,932 SEK 52,800,000 Kingdom of Sweden, 10.25% due 5/5/03 8,532,530 SEK 41,000,000 Kingdom of Sweden, 6.00% due 2/9/05 5,305,104 ---------------- 32,340,910 ---------------- United Kingdom - 1.8% GBP 4,160,000 Guaranteed Export Financial Corp, 12.88% due 9/29/02 8,460,045 ----------------
2 See accompanying notes to financial statements. GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Par Value Description Value ($) - ------------------------------------------------------------------------------------------------------------------- United States - 35.3% Asset Backed Securities - 0.6% USD 3,000,000 Augusta Funding VI Series 1996-A3, 7.375% due 4/15/13 144A 2,973,715 USD 3,051,948 Banc One Student Loan Trust 1994-A Class A2, Variable Rate, 1 mo. LIBOR + .30% (5.74%), due 10/25/16 3,064,156 USD 5,000,000 Big Flower Receivables Master Trust 96-2 Class A, Variable Rate, LIBOR + .25% (5.88%), due 4/15/03 144A 5,006,250 USD 5,000,000 Bombardier Receivables Master Trust I 97-1 Class A Variable Rate, 1 mo. LIBOR + .12% (5.56%), due 4/15/04 5,007,031 USD 2,000,000 Discover Card Master Trust I 94-2 Class A, Variable Rate, 1 mo. LIBOR + .35% (5.77%), due 10/16/04 2,017,600 USD 2,000,000 Discover Card Master Trust I Series 1996-2A, Variable Rate, 1 mo. LIBOR +.22% (5.64%), due 7/18/05 2,004,000 USD 13,000,000 Eagle Pier Corp BV, Variable Rate, 6 mo. LIBOR + .25% (6.00%), due 10/03/01 13,065,000 USD 5,300,000 European Sovereign Investments, Variable Rate, 3 mo. LIBOR + .10% (5.60%), due 7/28/99 5,313,250 USD 5,000,000 First Deposit Master Trust Series 96-1A, Variable Rate, 1 mo. LIBOR +.17% (5.60%), due 8/15/07 5,012,500 USD 1,950,000 Keycorp Student Loan Trust 94-B Certificates, Variable Rate, 1 mo. LIBOR + .73% (6.11%), due 11/25/21 1,950,000 USD 8,661,448 Keystone Auto Grantor Trust Series 1996-A Class A, 6.60% due 12/15/02 144 8,769,716 USD 10,000,000 MBNA Master Credit Card Trust 94-C Class A, Variable Rate, 1 mo. LIBOR + .25% (5.69%), due 3/15/04 10,059,375 USD 12,000,000 MBNA Master Credit Card Trust 96-J Class A, Variable Rate. 1 mo. LIBOR + .15% (5.57%), due 2/15/06 12,030,000 USD 9,000,000 National Premier Finance 95-2, 6.21% due 6/01/99 144A 8,982,000 USD 6,500,000 National Premier Finance IX 96-1A, 7.20% due 7/01/00 6,604,000 USD 10,000,000 Navistar Financial Dealer Note Master Trust 90-A Class A3, Variable Rate, 1 mo. LIBOR + .90% (6.28%), due 1/25/03 10,137,500 USD 8,000,000 Navistar Financial Dealer Note Master Trust 95-1 Class A, Variable Rate, 1 mo. LIBOR + .30% (5.74%), due 8/25/07 8,062,500 USD 1,947,871 New York City Tax Lien Series 1996-1 Class B, 6.91% due 5/25/05 144A 1,986,828 USD 4,000,000 PARMA Food Corp BV, Variable Rate, 3 mo. LIBOR + .25% (5.87%), due 12/20/00 3,996,400 USD 10,000,000 Prudential Bank & Trust Master Trust Series 94-A Class A, Variable Rate, 1 mo. LIBOR +.28% (5.66%), due 8/15/01 10,037,500 USD 2,620,000 SMS Student Loan Trust 94-B Certificates, Variable Rate, 1 mo. LIBOR + .75% (6.42%), due 10/25/23 2,620,000 USD 5,000,000 Student Loan Marketing Association Series 1996-4 Class A2, Variable Rate, 3 mo. LIBOR +.64% (5.76%), due 7/25/09 5,021,875 USD 3,465,000 TMS Auto Grantor Trust Series 1996-1 Class CTFS, 7.10% due 12/20/02 3,556,823 ---------------- 137,278,019 ---------------- Structured Notes - 0.0% USD 2,000,000 Bankers Trust Medium Term Note, 17.10% due 10/14/97 (b) 2,271,000 ----------------
See accompanying notes to 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 28, 1997
Par Value Description Value ($) - ------------------------------------------------------------------------------------------------------------------- U.S. Government Agency - 5.5% USD 1,700,000 Agency for International Development Floater (Support of Belize), Variable Rate, 6 mo. U.S. Treasury Bill + .50% (5.73%), due 1/01/14 1,697,875 USD 16,666,667 Agency for International Development Floater (Support of India), Variable Rate, 3 mo. U.S. Treasury Bill + .45% (5.56%), due 2/01/99 16,671,875 USD 5,000,000 Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10% (5.47%), due 2/01/27 5,020,313 USD 2,500,000 Agency for International Development Floater (Support of Zimbabwe), Variable Rate, 3 mo. U.S. Treasury Bill * 115% (5.09%), due 1/01/12 2,501,563 ---------------- 25,891,626 ---------------- Total United States 165,440,645 ---------------- Venezuela - 0.7% USD 2,000,000 Republic of Venezuela Discount Bond Series A, Variable Rate, 6 mo. LIBOR + .81% (6.44%), due 3/31/20 1,725,000 USD 2,000,000 Republic of Venezuela Discount Bond Series B, Variable Rate, 6 mo. LIBOR + .81% (6.44%), due 3/31/20 1,725,000 ---------------- 3,450,000 ---------------- TOTAL DEBT OBLIGATIONS (Cost $389,693,919) 397,853,197 ---------------- LOAN PARTICIPATIONS - 1.0% Russia - 1.0% ECU 1,000,000 Russia Vnesheconombank Loan Agreement (Participation with Bank of America)* 1,004,376 FRF 25,000,000 Russia Vnesheconombank Loan Agreement (Participation with Banque Paribas, Chase Manhattan, Bank of America, Lehman Brothers and J.P. Morgan)* 3,834,053 ---------------- 4,838,429 ---------------- TOTAL LOAN PARTICIPATIONS (Cost $1,570,993) 4,838,429 ---------------- Principal Amount (000's omitted) CALL OPTIONS PURCHASED - 2.4% Cross Currency Options - 1.9% DEM 269,300 DEM Call/BEF Put, Expires 4/11/97 Knock Out 20.50, Strike 20.50 1,052,826 ECU 117,800 ECU Call/DEM Put, Expires 5/14/97 Knock Out 1.894, Strike 1.894 2,965,503 ECU 210,500 ECU Call/DEM Put, Expires 6/13/97 Knock Out 1.9075, Strike 1.9075 3,714,237 ECU 132,800 ECU Call/DEM Put, Expires 7/24/97 Knock Out 1.915, Strike 1.92 1,389,148 ---------------- 9,121,714 ---------------- Options on Bonds - 0.4% USD 8,500 Brazil Discount Z, Expires 4/25/97 Strike 73.00 754,375 SEK 230,000 Sweden Government Bond 1033, Expires 4/11/97 Strike 117.725 894,774 ---------------- 1,649,149 ---------------- Options on Currency - 0.1% USD 25,000 German Mark, Expires 2/9/98 Strike 1.61 637,500 ---------------- TOTAL CALL OPTIONS PURCHASED (Cost $8,576,546) 11,408,363 ----------------
4 See accompanying notes to financial statements. GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Description Value ($) - ------------------------------------------------------------------------------------------------------------------- Principal Amount (000's omitted) PUT OPTIONS PURCHASED - 2.5% Cross Currency Options - 0.4% DEM 112,000 DEM Put/ITL Call, Expires 1/21/98 Strike 950.00 265,372 DEM 109,600 DEM Put/ITL Call, Expires 3/18/97 Strike 1025.00 1,460,727 ---------------- 1,726,099 ---------------- Options on Bonds - 0.0% USD 1,500 Venezuela Discount Bond, Expires 7/10/97 Strike 88.25 less DCB offer 4,935 ---------------- Options on Currency - 2.1% USD 108,400 French Franc, Expires 6/30/97 Strike 5.195 8,780,400 USD 25,000 German Mark, Expires 2/9/98 Strike 1.61 1,190,000 ---------------- 9,970,400 ---------------- TOTAL PUT OPTIONS PURCHASED (Cost $4,714,088) 11,701,434 ---------------- Shares RIGHTS AND WARRANTS - 0.0% Mexico - 0.0% 7,221,000 Mexican Value Recovery Rights, Expires 6/30/03 - ---------------- Venezuela - 0.0% 19,280 Republic of Venezuela Recovery Warrants, Expires 4/15/20 - ---------------- TOTAL RIGHTS AND WARRANTS (Cost $0) - ---------------- Par Value SHORT-TERM INVESTMENTS - 5.2% Repurchase Agreement - 4.0% $ 18,848,183 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97 with a maturity value of $18,855,801 and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $19,245,557. 18,848,183 ---------------- U.S. Government - 0.0% 6,000,000 U.S. Treasury Bill, 5.56% due 1/08/98 (a) 5,725,278 ---------------- TOTAL SHORT-TERM INVESTMENTS (Cost $24,529,663) 24,573,461 ----------------
See accompanying notes to 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 28, 1997 - ------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS - 95.8% (Cost $429,085,209) * * 450,374,884 Other Assets and Liabilities (net) - 4.2% 19,766,338 ---------------- TOTAL NET ASSETS - 100.0% $ 470,141,222 ================
Notes to the Schedule of Investments: DCB - Debt Conversion Bond FLIRB- Front Loaded Interest Reduction Bond GTB - Greek Treasury Bill PIK - Payment In Kind Knock Out - Option will expire if underlying security reaches knock out price. (a) All or a portion of this security is held as collateral for open futures. (b) Principal is linked to the value of the Brazilian Capitalization Bond and the Brazilian IDU Bond. Restricted as to public resale. At the date of aquisition, this security was valued at cost. There were no outstanding unrestricted securities of the same class as those held. 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. Variable and step up rates - The rates shown on variable and step up rate notes are the current interest rates at February 28, 1997, which are subject to change based on the terms of the security. * Non-performing. Borrower not currently paying interest. ** The aggregate identified cost for federal income tax purposes is $429,103,531, resulting in gross unrealized appreciation and depreciation of $28,819,643 and $7,548,290, respectively, and net unrealized appreciation of $21,271,353. Currency Abbreviations ATS - Austrian Schilling FRF - French Franc AUD - Australian Dollar GBP - British Pound BEF - Belgian Franc GRD - Greek Drachma CAD - Canadian Dollar ITL - Italian Lira CHF - Swiss Franc JPY - Japanese Yen DEM - German Mark NLG - Netherlands Guilder DKK - Danish Krone NZD - New Zealand Dollar ECU - European Currency Unit SEK - Swedish Krona ESP - Spanish Peseta USD - United States Dollar 6 See accompanying notes to the financial statements. GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Statement of Assets and Liabilities - February 28, 1997 ----------------------------------------------------------------------------- Assets: Investments, at value (cost $429,085,209)(Note 1) $ 450,374,884 Foreign currency, at value (cost $6,640,717)(Note 1) 6,399,306 Receivable for investments sold 52,631 Receivable for Fund shares sold 17,973 Interest receivable 10,057,130 Receivable for open forward foreign currency contracts (Notes 1 and 6) 42,289,271 Receivable for expenses waived or borne by Manager (Note 2) 146,626 ------------------ Total assets 509,337,821 ------------------ Liabilities: Payable for investments purchased 16,812,715 Written options outstanding, at value (premiums $2,308,750)(Notes 1 and 6) 2,065,000 Payable to brokers for open futures contracts (Note 1) 921,292 Payable for open forward foreign currency contracts (Notes 1 and 6) 19,038,282 Payable to affiliate for (Note 2): Management fee 181,094 Shareholder service fee 54,443 Accrued expenses 123,773 ------------------ Total liabilities 39,196,599 ------------------ Net assets $ 470,141,222 ================== Net assets consist of: Paid-in capital $ 413,604,897 Distributions in excess of net investment income (7,695,280) Accumulated undistributed net realized gains 21,692,673 Net unrealized appreciation 42,538,932 ================== $ 470,141,222 ================== Net assets attributable to: Class I shares $ 1,162,376 ================== Class III shares $ 468,978,846 ================== Shares outstanding: Class I 95,601 ================== Class III 38,558,577 ================== Net asset value per share: Class I $ 12.16 ================== Class III $ 12.16 ==================
See accompanying notes to the financial statements. 7 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Statement of Operations - Year Ended February 28, 1997 ----------------------------------------------------------------------------- Investment income: Interest (including securities lending income of $10,682) $ 25,865,143 ------------- Expenses: Management fee (Note 2) 1,782,864 Custodian and transfer agent fees 223,676 Audit fees 70,098 Registration fees 34,204 Legal fees 16,444 Trustees fee (Note 2) 1,571 Miscellaneous 2,782 Fees waived or borne by Manager (Note 2) (1,149,683) ------------- 981,956 Shareholder service fee (Note 2) Class I 506 Class III 444,068 ------------- Net expenses 1,426,530 ------------- Net investment income 24,438,613 ------------- Realized and unrealized gain (loss): Net realized gain (loss) on: Investments 9,316,751 Closed futures contracts 15,320,444 Written options 1,200,352 Foreign currency, forward contracts and foreign currency related transactions 11,702,212 ------------- Net realized gain 37,539,759 ------------- Change in net unrealized appreciation (depreciation) on: Investments (1,035,032) Open futures contracts (2,351,421) Written options (912,920) Foreign currency, forward contracts and foreign currency related transactions 24,298,924 ------------- Net unrealized gain 19,999,551 ------------- Net realized and unrealized gain 57,539,310 ------------- Net increase in net assets resulting from operations $ 81,977,923 =============
8 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 February 28, 1997 February 29, 1996 ----------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income $ 24,438,613 $ 19,875,362 Net realized gain 37,539,759 14,407,640 Change in net unrealized appreciation (depreciation) 19,999,551 23,912,792 ----------------- ----------------- Net increase in net assets resulting from operations 81,977,923 58,195,794 ----------------- ----------------- Distributions to shareholders from: Net investment income Class III (20,376,190) (19,852,732) ----------------- ----------------- Net realized gains Class III (15,129,774) (8,211,314) ----------------- ----------------- In excess of net realized gains Class III (14,706,753) (5,504,514) ----------------- ----------------- (50,212,717) (33,568,560) ----------------- ----------------- Net share transactions: (Note 5) Class I 1,123,429 - Class III 201,090,729 (27,129,814) ----------------- ----------------- Net increase (decrease) in net assets resulting from Fund share transactions 202,214,158 (27,129,814) ----------------- ----------------- Total increase (decrease) in net assets 233,979,364 (2,502,580) Net assets: Beginning of period 236,161,858 238,664,438 ----------------- ----------------- End of period (including distributions in excess of net investment income and accumulated undistributed net investment income of $7,695,280 and $2,213,016, respectively) $ 470,141,222 $ 236,161,858 ================= =================
See accompanying notes to the financial statements. 9 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Financial Highlights (For a Class I share outstanding throughout the period) -----------------------------------------------------------------------------
Period from January 2, 1997 (commencement of operations) to February 28, 1997 ---------------------------- Net asset value, beginning of period $ 11.75 -------------- Income from investment operations: Net investment income 0.11 Net realized and unrealized gain 0.30 -------------- Total from investment operations 0.41 -------------- Net asset value, end of period $ 12.16 ============== Total Return (a) 3.49% Ratios/Supplemental Data: Net assets, end of period (000's) $ 1,162 Net expenses to average daily net assets 0.53%* Net investment income to average daily net assets 5.91%* Portfolio turnover rate 90% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01
* Annualized. (a) Calculation excludes purchase premiums. The total return would have been lower had certain expenses not been waived during the period shown. 10 See accompanying notes to the financial statements. 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, ----------------------------------------------- 1997 1996 1995* ----------- ----------- ----------- Net asset value, beginning of period $ 10.92 $ 9.99 $ 10.00 ----------- ----------- ----------- Income from investment operations: Net investment income 0.66 1.05 0.24 Net realized and unrealized gain (loss) 2.07 1.62 (0.09) ----------- ----------- ----------- Total from investment operations 2.73 2.67 0.15 ----------- ----------- ----------- Less distributions to shareholders: From net investment income (0.60) (1.04) (0.16) From net realized gains (0.45) (0.42) - In excess of net realized gains (0.44) (0.28) - ----------- ----------- ----------- Total distributions (1.49) (1.74) (0.16) ----------- ----------- ----------- Net asset value, end of period $ 12.16 $ 10.92 $ 9.99 =========== =========== =========== Total Return (a) 25.57% 27.36% 1.49% Ratios/Supplemental Data: Net assets, end of period (000's) $ 468,979 $ 236,162 $ 238,664 Net expenses to average daily net assets 0.40% 0.40% 0.40%** Net investment income to average daily net assets 6.86% 8.54% 8.46%** Portfolio turnover rate 90% 85% 64% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.03 $ 0.03 $ 0.01
* Period from September 30, 1994 (commencement of operations) to February 28, 1995. ** Annualized. (a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. See accompanying notes to the financial statements. 11 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1997 - -------------------------------------------------------------------------------- 1. Significant accounting policies The 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 into classes. The Fund seeks high total return by investing primarily in investment grade bonds denominated in various currencies including U.S. dollars and multicurrency units, while generally attempting to hedge substantially all of its foreign currency risk. The Fund generally seeks to provide a total return greater than that provided by the international fixed income securities market. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 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. 12 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Certain investments in 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. 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 net exchange gains and losses on disposition of foreign currencies, 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 purchase of 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 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 held as of February 28, 1997. 13 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 28, 1997. Options The Fund may write call and put options on securities it owns or in which it may invest. 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 transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price 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. See Note 6 for all open written option contracts as of February 28, 1997. The Fund may also purchase put and call options. 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. The risk associated with purchasing put and call options is limited to the premium paid. 14 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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. 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. Security lending The Fund may lend its securities to certain member firms of the New York Stock Exchange. 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 28, 1997 there were no securities on loan. 15 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to the differing treatments for foreign currency transactions and redemptions in-kind. Gains resulting from such in-kind transactions amounted to $8,750. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ---------------------------- ------------------------ -------------------------- ($13,970,719) $13,961,969 $8,750
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. 16 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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. 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 in such a manner as deemed equitable by the Trustees, 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 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 .15% of the amount invested. Effective June 1, 1996, the Manager will reduce such premium only when any portion of a purchase is offset by a corresponding redemption occurring on the same day. All purchase premiums are paid to and recorded as paid-in capital by the Fund. For the year ended February 28, 1997, the Fund received $335,528 in purchase premiums. There is no premium for cash redemptions, reinvested distributions or in-kind transactions. 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 and the possible imposition of currency exchange blockages 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. 17 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .25% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .40%; thus the net annual expense ratio after the waiver for a Class III shareholder is unchanged. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997, was $1,571. 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 28, 1997, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Proceeds --------------------- -------------------- U.S. Government securities $ 30,890,844 $ - Investments (non-U.S. Government securities) 438,530,104 285,791,453
4. Principal shareholders At February 28, 1997, 100% of the outstanding Class I shares of the Fund were held by one shareholder and 41% of the outstanding Class III shares of the Fund were held by one shareholder. 18 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 January 2, 1997 (commencement of operations) to February 28, 1997 --------------------------------------------------------- Class I: Shares Amount ------------------------ ------------------------- Shares sold 95,601 $ 1,123,429 Shares issued to shareholders in reinvestment of distributions - - Shares repurchased - - ------------------------ ------------------------- Net increase 95,601 $ 1,123,429 ======================== =========================
Year Ended Year Ended February 28, 1997 February 29, 1996 --------------------------------------------- ----------------------------------------- Class III: Shares Amount Shares Amount ------------------- ---------------------- ----------------- -------------------- Shares sold 20,865,195 $ 251,713,393 9,674,966 $ 108,698,337 Shares issued to shareholders in reinvestment of distributions 3,723,568 43,606,382 2,519,953 26,923,624 Shares repurchased (7,658,494) (94,229,046) (14,452,061) (162,751,775) ------------------- ---------------------- ----------------- -------------------- Net increase/(decrease) 16,930,269 $ 201,090,729 (2,257,142) $ (27,129,814) =================== ====================== ================= ====================
19 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 6. Financial instruments A summary of outstanding financial instruments at February 28, 1997 is as follows: Forward currency contracts
Net Unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) ----------------- ---------------------------- ------------------- -------------------- ------------------ Buys 4/24/97 CAD 21,600,000 $ 15,861,651 $ (196,873) 3/7/97 DEM 364,600,000 216,061,652 (11,548,149) 3/20/97 DEM 44,400,000 26,332,230 (2,683,899) 4/18/97 GBP 10,900,000 17,766,924 151,559 3/20/97 ITL 34,808,928,000 20,573,625 (2,006,368) 3/27/97 ITL 8,702,232,000 5,141,364 (503,634) 4/10/97 JPY 6,210,000,000 51,760,057 337,854 ------------------ $ (16,449,510) ================== Sales 5/23/97 AUD 23,600,000 $ 18,299,395 $ (252,475) 4/24/97 CAD 80,000,000 58,746,856 1,051,028 3/7/97 DEM 477,200,000 282,788,317 29,610,176 3/20/97 DEM 42,000,000 24,908,866 3,316,125 4/18/97 GBP 52,200,000 85,085,635 2,581,257 3/20/97 ITL 44,478,536,000 26,288,794 2,727,336 4/10/97 JPY 6,860,000,000 51,177,777 2,051,348 3/21/97 NZD 2,563,879 1,771,448 29,165 ------------------ $ 41,113,960 ==================
20 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward cross currency contracts
Net Unrealized Settlement Appreciation Date Deliver/Units of Currency Receive/In Exchange for (Depreciation) -------------- ------------------------------------ ------------------------------------ ---------------- 4/15/97 BEF 90,704,680 DEM 4,400,000 $ 2,610 3/14/97 DEM 39,900,000 NLG 44,855,580 (9,811) 3/20/97 DEM 22,200,000 ITL 22,012,224,000 (155,911) 4/25/97 DEM 19,200,000 FRF 64,790,360 (1,214) 4/28/97 DEM 498,163,659 ECU 257,100,000 (26,904) 5/5/97 DEM 41,000,000 CHF 35,475,250 (167,372) 5/7/97 DEM 44,700,000 SEK 198,030,790 (116,114) 7/23/97 DEM 32,900,000 ESP 2,786,022,900 (276,433) 5/6/97 DKK 262,045,140 DEM 68,600,000 (24,929) 4/28/97 ECU 101,800,000 DEM 197,212,050 (12,108) 7/23/97 ESP 846,500,000 DEM 10,000,000 86,219 4/25/97 FRF 263,369,000 DEM 78,000,000 (22,925) 3/20/97 ITL 43,290,288,000 DEM 43,400,000 152,675 3/14/97 NLG 136,620,299 DEM 121,800,000 191,919 5/7/97 SEK 726,346,250 DEM 161,500,000 (1,033,163) ---------------- $ (1,413,461) ================
21 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Futures contracts
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) -------------- ----------------------------------------- ----------------------- ----------------- ------------------- Buys 136 Australian Government Bond 3 Year March 1997 $ 12,392,016 $ (52,312) 262 Australian Government Bond 10 Year March 1997 27,040,464 (578,244) 253 Canadian Government Bond June 1997 21,594,353 (206,747) 69 German Government Bond June 1997 10,449,282 (15,874) 199 Italian Government Bond 10 Year June 1997 30,179,725 (602,940) 11 Japanese Government Bond June 1997 11,281,397 5,835 174 MATIF ECU Bond March 1997 21,048,513 382,890 105 MATIF ECU Bond June 1997 11,613,188 (55,573) 359 U.K. Gilt March 1997 33,422,760 575,584 370 U.K. Gilt June 1997 33,666,756 (275,024) ------------------- $ (822,405) =================== Sales 120 Euro Dollar September 1997 $ 28,200,000 $ 92,100 159 MATIF FRF Bond March 1997 20,322,758 (623,834) 262 MATIF FRF Bond June 1997 30,151,077 (43,993) 234 Spanish Government Bond 10 Year June 1997 18,380,476 345,636 133 Swiss Government Bond March 1997 12,372,093 (606,877) 27 Swiss Government Bond June 1997 2,205,418 (6,561) 46 U.S. Treasury Bond June 1997 5,080,125 93,093 39 U.S. Treasury Note 5 Year June 1997 4,124,859 24,192 5 U.S. Treasury Note 10 Year March 1997 541,719 3,556 13 U.S. Treasury Note 10 Year June 1997 1,399,938 1,403 60 U.S. Treasury Bill 90 Day June 1997 14,215,500 18,325 ------------------- $ (702,960) ===================
At February 28, 1997, the Fund has cash and/or securities to cover any margin requirements on open futures contracts. 22 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Written option transactions
Puts Calls Principal Principal Amount of Amount of Contracts Contracts (000's omitted) Premiums (000's omitted) Premiums ------------------ -------------- -------------------- ------------------- Outstanding, beginning of period 12,000 $ 606,000 3,022,000 $ 1,095,890 Options written 25,000 1,243,750 3,725,000 1,169,463 Options exercised (12,000) (606,000) - - Options expired - - (6,722,000) (1,200,353) ------------------ -------------- -------------------- ------------------- Outstanding, end of period 25,000 $ 1,243,750 25,000 $ 1,065,000 ================== ============== ==================== =================== Summary of written options outstanding Principal Amount of Contracts Expiration (000's omitted) Exercise Price Date Value ----------------------- ------------------- -------------- --------------- Calls Japanese Yen Call 25,000 JPY 117.00 JPY 02/09/98 $ 1,240,000 Puts Japanese Yen Put 25,000 JPY 117.00 JPY 02/09/98 825,000 --------------- $ 2,065,000 ===============
See Notes to the Schedule of Investments for definitions of currency abbreviations. 23 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Federal Income Tax Information on Distributions - (unaudited) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all the Fund's distributions are from investment company taxable income, except that the Fund has designated 10.74% of distributions as net capital gain dividends. 24 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. since 1993. Management Discussion and Analysis of Fund Performance - ------------------------------------------------------ The Class III shares of the Currency Hedged International Bond Fund returned 25.6% for the fiscal year ended February 28, 1997, compared to 14.3% 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 past year was an exceptional period for the Fund. It outperformed its benchmark by 11.3% by following a variety of successful strategies. During the year bond market selection, currency selection and the decision to include emerging country debt added value above the benchmark return in each quarter. Although foreign interest rates generally declined during the year, the strength of the U.S. dollar meant that many foreign bond markets performed poorly. This was especially true in Japan, the second largest bond market in the world, where the bond market produced a total return (in U.S. dollars) of - -5.1% for the twelve months ended February 28, 1997. The Fund was significantly underweight in the Japanese market throughout the year and overweight in many of the high yielding bond markets. The bond markets in Italy, Spain and Sweden rose strongly on increased confidence in European Monetary Union (EMU). The Fund was overweight in the U.K. pound, one of the few currencies to outperform the U.S. dollar. Because the fund hedged much of its non-U.S. dollar currency exposure according to its investment policy, it benefited significantly from the dollar's strength. During the year the Fund held a position in emerging country sovereign debt, emphasizing undervalued issues. The strong bull market resulting from improved country fundamentals and renewed investor confidence produced index returns of more than 40% and helped the Fund exceed its benchmark's return. Outlook - ------- The Fund is structured to benefit from outperformance in the Australian, Canadian, Danish, U.K., Swedish and emerging bond markets. We expect underperformance from the French, Japanese, Spanish and Swiss bond markets. Our strategy maintains a market duration in each country. Strong relative performance is expected from the U.K. pound, Dutch guilder, Italian lira, Spanish peseta, Swiss franc and U.S. dollar. the Australian dollar, Belgian franc, Canadian dollar, French franc, Deutschemark and Swedish krona 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 Hedged Index As of February 28, 1997 Average Annual Total Return
Since 1 Year 5 Year Inception 09/30/94 Class III 25.4% n/a 22.1% 01/02/97 Class I n/a n/a 3.3%
[LINE GRAPH APPEARS HERE]
Date GMO Currency Hedged International Bond Fund J.P. Morgan Non-U.S. Government Bond Hedged Index 09/30/94 9,985 10,000 02/28/95 10,134 10,408 02/29/96 12,906 12,048 02/28/97 16,207 13,772
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. 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 paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Performance for Class I shares may be different due to higher shareholder service fees. Class II shares have not commenced operations. Past performance is not indicative of future performance. Information is unaudited. GMO Currency Hedged International Core Fund (A Series of GMO Trust) Annual Report February 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 17, 1997 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- STOCK AND EQUIVALENTS - 94.7% Australia - 4.6% 11,400 Aberfoyle Ltd 33,802 33,840 Adelaide Brighton Ltd 48,593 53,100 Advance Property Fund 61,412 13,900 Amalgamated Holdings Ltd 64,196 108,906 Amcor Ltd 716,838 323,832 Australia and New Zealand Banking Group Ltd 2,020,922 19,000 Australian Gas & Light 108,691 108,308 Australian National Industries Ltd 120,218 274,109 Boral Ltd 744,672 8,376 Bougainville Copper Ltd * 3,641 25,800 Broken Hill Proprietary Ltd 341,443 23,900 BT Property Trust 31,908 128,129 Burns Philp & Co Ltd 198,907 10,086 Caltex Australia Ltd 34,055 2,400 Capcount Property Trust 1,639 46,100 Capral Aluminum Ltd 158,876 22,900 Centaur Mining & Exploration Ltd * 33,950 21,600 Coca-Cola Amatil Ltd 197,838 344,598 Coles Myer Ltd 1,516,594 35,757 Comalco Ltd 189,841 35,088 Commonwealth Bank of Australia 349,157 28,824 Consolidated Rutile Ltd 23,268 37,336 Cortecs International Ltd * 140,554 2,100 Coventry Group Ltd 8,395 29,700 CRA Ltd 444,741 15,400 CSL Ltd 78,295 332,663 CSR Ltd 1,174,869 78,200 Cultus Petroleum * 128,682 3,602 Dominion Mining Ltd Warrants 12/31/98 * 1,118 7,205 Dominion Mining Ltd * 4,977 48,323 Email Ltd 152,659 16,900 Emperor Mines Ltd * 29,515 36,700 FAI Life Ltd 23,359 12,200 Faulding (FH) & Co Ltd 71,022 34,690 Foodland Associated 166,944 593,357 Fosters Brewing Group Ltd 1,238,916 11,216 G E Crane Holdings Ltd 101,859 146,000 General Property Trust Units 284,446 383,426 Goodman Fielder Ltd 464,280 15,300 GWA International Ltd 26,246 138,331 Hardie (James) Industries Ltd 397,278 30,350 HIH Winterthur International Holdings 72,793 800 Hills Motorway Group 1,149 6,200 Holyman Ltd 25,198 15,482 ICI Australia Ltd 146,609
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Australia - continued 1,000 Jupiters Ltd 2,158 19,200 KLZ Ltd 52,757 20,566 Leighton Holdings 89,395 2,100 Lend Lease Corp Ltd 38,403 42,200 Macmahon Holdings 32,756 48,599 Mayne Nickless Ltd 287,069 55 Memtec Ltd 1,131 245,943 MIM Holdings Ltd 341,713 30,300 Mirvac Ltd 62,090 9,786 Mount Leyshon Gold Mines 16,863 59,966 National Australia Bank Ltd 754,970 4,829 National Consolidated Ltd 3,523 624,803 News Corp Ltd 3,326,909 342,883 News Corp Ltd Preferred 1.19% 1,548,968 24,115 Normandy Mining Ltd 33,318 146,675 North Broken Hill Peko Ltd 474,751 26,823 Orbital Engine Corp * 21,445 600 Pacific BBA Ltd 2,003 256,017 Pacific Dunlop Ltd 616,033 82,070 Pasminco Ltd 152,887 306,352 Pioneer International Ltd 910,737 22,874 PMP Communications Ltd 57,703 22,200 Portman Mining Ltd 45,836 8,399 Publishing & Broadcasting Ltd 42,050 95,419 Qantas Airways Ltd 180,717 12,600 QBE Insurance Group Ltd 63,082 71,035 QCT Resources Ltd 98,145 108,999 QNI Ltd 225,049 10,900 Reinsurance Australia 37,057 43,970 RGC Ltd 174,743 48,069 Rothmans Holdings Ltd 324,607 235,522 Santos Ltd 848,249 98,697 Schroders Property 182,329 21,695 Sea World Property Trust 28,627 1,400 Seven Network Ltd 4,640 6,000 Siddons Ramset Ltd 31,110 18,351 Simsmetal Ltd 111,132 37,329 Smith (Howard) Ltd 313,130 115,797 Southcorp Holdings Ltd 409,860 5,500 St George Bank 32,872 38,174 Stockland Trust Group 98,077 24,800 Tabcorp Holdings 113,766 13,163 Ticor Ltd * 10,932 8,800 Village Roadshow 29,166 3,749 W H Soul Pattison & Co Ltd 162,959 66,664 Walker Corp 47,088
2 See accompanying notes to the financial statements. GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Australia - continued 211,937 Western Mining Corp Holdings Ltd 1,335,949 7,300 Westfield Holdings 112,759 184,925 Westfield Trust Units 355,976 5,741 Weston Foods Ltd 33,421 78,450 Westpac Banking Corp 444,518 44,000 Westpac Property Trust 60,792 21,591 Wills (WD & HO) Holdings Ltd 42,065 ---------------- 27,012,650 ---------------- Austria - 0.8% 247 Austrian Airlines * 36,797 1,472 Bank Austria AG (Participating Certificate) 43,363 3,916 Bau Holding AG Preferred 2.42% (Non Voting) 187,870 6,228 Brau Union AG 351,207 8,150 Creditanstalt-Bankverein 500,749 6,328 Creditanstalt-Bankverein Preferred 1.65% 242,283 446 EA-Generali AG 123,876 3,040 EVN Energie-Versorgung Niederoesterreich AG 447,510 1,186 Lenzing AG 57,098 1,334 Leykam-Muerztaler Papier und Zellstoff AG 37,164 5,178 OEMV AG 610,140 2,009 Oesterreichische Brau Beteiligungs AG 123,436 10,365 Oesterreichische Elektrizitaetswirtschafts AG 752,870 6,404 Oesterreichische Laenderbank AG 438,209 3,982 Oesterreichische Laenderbank AG Preferred (Non Voting) 139,758 3,389 Radex-Heraklith AG 122,924 352 RAS Versicherungs AG 43,522 51 Strabag Oesterreich AG 2,966 904 Wienerberger Baustoffindustrie AG 164,119 ---------------- 4,425,861 ---------------- Canada - 3.9% 8,098 Abitibi-Price Inc 133,594 2,600 Agrium Inc * 35,665 23,600 Air Canada Inc * 119,131 10,000 Anderson Exploration Ltd * 118,882 10,600 BC Telecom Inc 231,868 27,298 BCE Inc 1,326,057 3,300 BCE Mobile Communications * 105,019 400 Biochem Pharma Inc * 21,216 2,100 Bombardier Inc Class A 40,175 40,700 Bombardier Inc Class B 781,604 14,900 Brascan Ltd Class A (Convertible) 356,994 33,000 CAE Industries Inc 275,221 2,100 Cambior Inc 33,645 20,094 Canadian Imperial Bank of Commerce 974,638 9,500 Canadian National Railway 344,027 1,200 Canadian Natural Resources * 28,620
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Canada - continued 34,400 Canadian Pacific Ltd 845,592 26,400 Canadian Tire Corp Class A 480,913 5,400 Canfor Corp 57,283 400 Cinram Ltd 10,930 24,289 Cominco Ltd 693,007 7,800 Corel Corp * 50,786 5,300 Co-Steel Inc 87,241 17,200 Cott Corp * 169,244 16,700 Dofasco Inc 302,381 8,400 Dominion Textile Inc 39,330 47,182 Domtar Inc 429,743 18,800 Donohue Inc Class A 361,724 2,100 Dupont Canada Class A 50,775 13,100 Echo Bay Mines Ltd * 101,588 1,400 Falconbridge Ltd 32,672 17,193 Fletcher Challenge Canada Ltd Class A 285,523 16,498 Gulf Canada Resources Ltd * 115,869 2,300 Hudsons Bay Co 46,020 36,300 Imasco Ltd 995,867 13,593 Imperial Oil Ltd 596,664 12,500 Inco Ltd 440,321 8,700 Inmet Mining Ltd * 58,556 5,500 International Forest Products A * 40,237 2,900 Ipsco Inc 83,803 2,400 Laidlaw Inc Class A 32,921 19,900 Laidlaw Inc Class B (Non Voting) 275,883 51,081 Macmillan Bloedel Ltd 706,292 5,200 Magna International Class A 274,095 400 MDS Inc Class B 8,121 24,700 Methanex Corp * 242,139 8,400 Molson Co Ltd, Class A 146,258 11,300 Moore Corporation Ltd 249,660 29,400 Newbridge Networks Corp * 934,545 7,699 Noranda Forest Inc 53,508 1,500 Noranda Inc 36,158 9,198 Norcen Energy Resource 196,826 116,400 Nova Corp of Alberta 1,068,710 20,400 Nova Scotia Power Inc 211,179 7,000 Oshawa Group Ltd Class A 104,726 4,400 Pegasus Gold Inc * 37,823 499 Petro Canada 7,228 900 Potash Corp of Saskatchewan 70,879 20,000 Provigo Inc * 82,669 2,200 QLT Phototherapeutics * 59,551 10,100 Quebecor Inc Class B 185,463 37,900 Repap Enterprises Inc * 67,099
4 See accompanying notes to the financial statements. GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Canada - continued 2,800 Rio Algom Ltd 71,183 12,100 Rogers Cantel Mobile Communications Class B * 203,599 5,100 Rogers Communications Inc Class B * 34,886 2,594 Royal Bank of Canada 104,660 11,400 Royal Oak Mines * 39,198 37,600 Seagram Ltd 1,467,525 6,800 Sears Canada Inc 65,418 14,800 Semi-Tech Class A 29,775 2,800 Shell Canada Ltd Class A 114,712 3,900 Slocan Forest Products Ltd 41,942 6,700 Southam Inc 103,424 20,700 Stelco Inc Class A * 113,578 400 Stone Consolidated Corp * 6,511 4,500 Suncor Inc 200,490 22,394 Teck Corp Class B 547,194 35,800 Telus Corp 542,146 21,700 Thomson Corp 446,891 3,000 Torstar Corp Class B 80,328 1,500 Total Petroleum North America 15,363 41,900 Transalta Corp 498,116 47,900 Transcanada Pipelines Ltd 888,335 7,199 United Dominion Inds Ltd 194,603 28,300 Westcoast Energy Inc 514,489 3,000 Weston George Ltd 164,387 ---------------- 22,842,911 ---------------- Finland - 0.2% 4,600 Amer Group Class A 96,387 1,500 Cultor OY Class 1 90,866 31,000 Enso OY Class A 264,752 500 Huhtamaki OY Class L 23,436 2,600 Instrumentarium OY, Class A 97,599 900 Instrumentarium OY, Class B 33,069 2,800 Kesko OY 40,875 2,500 Metra AB Class A 146,974 400 Metra AB Class B 23,834 6,900 Partek OY 114,157 12,921 Rautaruukki OY 121,642 300 Stockmann AB Class A 17,399 400 Stockmann AB Class B 21,848 12,700 Valmet OY 230,799 ---------------- 1,323,637 ---------------- France - 8.3% 4,255 Accor SA 585,526 1,768 Air Liquide L Shares 278,049 5,223 Alcatel Alsthom Cie Generale d'Electricite SA 536,299
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- France - continued 44,800 Assur Gen De France (Bearer) 1,576,606 31,136 Axa SA 2,072,892 31,136 Axa UAP * 111,487 44,469 Banque Nationale de Paris 2,017,664 3,100 Bertrand Faure SA 154,475 410 BIC SA 66,495 236 BIS SA 20,235 230 Bongrain 89,137 3,380 Bouygues 322,735 1,650 Canal Plus 309,304 1,500 Cap Gemini SA * 89,832 6,850 Casino Guichard-Perrachon 312,604 2,650 Casino Guichard-Perrachon Preferred 101,631 680 CEP Communications SA (Bearer) 56,097 21,059 Cerus * 511,570 1,060 Cetelem 131,353 2,420 CGIP 690,239 17,853 Cie Bancaire SA 2,165,310 1,784 Ciments Francais 60,747 4,010 Ciments Francais Class B Preferred 15.12% 157,942 348 Clarins 48,254 2,285 Club Mediterranee SA 175,467 566 Colas SA 78,383 40,424 Compagnie de Suez SA 1,975,329 11,220 Credit Commercial de France 525,817 9,070 Credit Local de France SA 905,838 16,446 Credit Lyonnais * 653,822 3,417 Credit National 224,909 230 Dassault Electronique SA 26,644 2,204 Dollfus-Mieg and Cie 62,515 297 Eiffage SA 18,871 31,990 Elf Aquitaine SA 3,060,143 332 Elf Gabon 89,158 3,938 Elf Sanofi SA 389,839 5,994 Eridania Beghin-Say SA 968,963 430 Essilor International 118,042 1,460 Esso 161,445 118,100 Euro Disney SCA (Bearer) * 216,619 196,500 Eurotunnel SA Units (Bearer) * 243,155 13,552 Financiere de Paribas SA 922,686 15,143 FINEXTEL 256,490 15,705 GAN (Group Assurances National) * 411,004 283 Gaz Et Eaux 125,175 3,060 Generale Des Eaux 425,918 290 Geophysique Cie Generale * 24,865 2,172 Group Axime * 278,300
6 See accompanying notes to the financial statements. GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- France - continued 400 Groupe Andre * 33,700 2,280 Groupe Danone 345,764 230 GTM-Entrepose 12,353 140 Guyenne Et Gascogne 48,163 270 Havas Advertising 32,700 130 Imetal 18,711 2,900 INGENICO SA 53,192 290 La Peyre 17,561 672 Labinal SA 152,746 39,593 Lafarge Coppee SA 2,480,947 9,014 Lagardere Groupe 265,802 1,650 Legris Industries 78,485 3,960 Lyonnaise Des Eaux 404,528 1,200 Metaleurop SA * 16,218 27,803 Michelin SA Class B 1,741,195 2,700 Moulinex SA * 62,556 6,270 Nord-Est 167,169 20 Parisienne de Reescompte (CPR-Cie) 1,706 2,375 Pechiney SA Class A 100,423 855 Pernod-Ricard 46,672 17,645 Peugeot SA 1,951,161 90 Pinault Printemps Redoute 38,086 1,800 Remy Cointreau SA 46,917 28,450 Renault SA 733,559 64,185 Rhone Poulenc SA Class A 2,253,173 1,680 Saint Louis 441,135 12,420 Saint-Gobain 1,831,183 3,840 Salomon SA 263,738 3,650 Seita 139,663 4,210 SGS Thomson Microelectronics * 276,735 70 SIMCO 6,782 11,160 Skis Rossignol 303,618 2,400 Societe Eurafrance 1,133,168 4,012 Societe Generale d 'Entreprise SA * 92,883 23,597 Societe Generale Paris 2,733,579 10 Sodexho Alliance 5,564 10,490 Sommer Allibert 318,532 17,639 SPIE Batignolles 929,118 900 Strafor Facom 71,086 640 Sylea (Bearer) 61,784 1,280 Technip SA (Compagnie Francaise) 129,409 25,767 Thomson CSF 816,342 10,070 Total SA 803,331 1,110 TV Francaise 102,870 30 Union Immobiliere de France 2,485 39,200 Usinor Sacilor 605,480
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- France - continued 7,010 Valeo 472,476 2,510 Vallourec 148,248 6,333 Worms et Compagnie SA 422,400 ---------------- 48,020,976 ---------------- Germany - 6.8% 6,000 Adidas AG 573,984 15,555 AGIV AG * 257,069 150 Axel Springer Verlag AG 104,845 68,700 Bankgesellschaft Berlin AG 1,314,424 88,300 BASF AG 3,255,938 137,450 Bayer AG 5,801,038 13,400 Bayerische Hypotheken-und Wechsel - Bank AG 396,079 250 Bayerische Motorenwerke AG 168,227 198 Berliner Kraft und Licht AG Class A 55,358 30,100 BHF Bank AG 713,186 3,450 Bilfinger & Berger 138,965 250 Brau und Brunnen * 20,880 3,500 Bremer Vulkan Verbund AG * 4,043 350 Buderus AG 159,637 32,890 Continental AG 640,967 450 Daimler-Benz 32,640 700 Degussa 298,543 2,350 Deutsche Babcock & Wilcox * 105,793 350 Didier-Werke AG 28,610 650 DLW AG * 53,711 13,550 Douglas Holdings AG 477,565 6,200 Draegerwerk AG Preferred 88,508 100 Dyckerhoff AG 39,095 116,381 FAG Kugelfischer 1,778,598 13,900 Fresenius AG Preferred .82 (Non Voting) 2,997,038 700 Friedrich Krupp AG 111,871 100 GEA AG Preferred 3.13% 34,238 14,250 Gerresheimer Glas AG 306,406 4,950 Heidelberg Port-Zement 407,564 4,900 Henkel KGAA Preferred 261,225 100 Horten AG 13,032 350 Kaufhalle AG * 35,452 27,096 Klockner Humboldt Deutz * 134,822 1,593 Klockner-Werke AG * 100,023 1,337 Kolbenschmidt * 21,304 1,750 Leirheit AG 58,050 601,805 Lufthansa AG 7,985,092 750 MAN AG 191,698 450 MAN AG Preferred 95,827 46,690 Metallgesellschaft * 995,364 1,400 Pfaff (GM) AG * 30,269
8 See accompanying notes to the financial statements. GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Germany - continued 33,700 Phoenix AG 493,064 100 Porsche AG Preferred (Non Voting) 112,546 1,250 Preussag AG 320,978 5,050 Puma AG Preferred 176,490 300 Rheinmetall Berlin AG 49,491 100 Rheinmetall Berlin AG Preferred (Non Voting) 5.60% 13,458 300 Rosenthal AG * 22,924 73,800 RWE Preferred 2,681,928 100 Salamander AG 11,847 1,300 Schering AG 117,895 450 Schmalbach-Lubeca 92,228 9,450 Schwarz Pharma AG 705,307 2,700 SGL Carbon AG 367,847 22,100 Siemens AG 1,117,305 21,950 SKW Trostberg AG 668,304 150 Strabag Bau AG Preferred 13,594 350 Strabag Bau AG * 30,414 250 Suedzucker AG 113,286 2,650 Thyssen AG 562,116 100 Varta AG * 16,586 6,500 Veba AG 371,935 1,850 Viag AG 816,950 400 Villeroy and Boch AG 54,022 100 Volkswagen AG Preferred .79% 38,088 100 Zanders Feinpapiere * 6,457 ---------------- 39,262,038 ---------------- Hong Kong - 9.5% 2,518,000 Allied Properties Ltd 461,720 1,153,500 Amoy Properties Ltd 1,377,825 146,000 ASM Pacific Technology 121,604 1,724,000 Cathay Pacific Airways Ltd 2,682,619 164,000 Century City International 58,239 728,000 Champion Technology Holdings 109,990 145,600 Champion Technology Holdings Warrants 6/30/98 * 8,837 583,000 Cheung Kong Holdings 5,552,202 87,000 China Light & Power Co 402,195 1,322,000 China Overseas Land & Inventory Ltd 772,475 600 Chinese Estates Holdings Ltd 639 326,000 CP Pokphand Co * 117,872 12,800 Dah Sing Financial Services 53,554 620,533 Dairy Farm International 480,913 262,500 Dao Heng Bank 1,349,109 398,000 Denway Investments * 34,434 69,133 Dickson Concept International Ltd 252,196 1,020,300 Elec & Eltek International Holdings Ltd 260,872 1,124 Evergo China Holdings * 176
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Hong Kong - continued 76,974 First Sign International Holdings 20,377 242,000 FPB Bank Holding Co 111,719 39,800 Furama Hotel Enterprises Ltd 66,813 265,000 Gold Peak Industry 172,811 24,000 Goldlion Holdings Ltd 21,384 641,281 Great Eagle Holdings Ltd 2,405,632 534,000 Guangzhou Investment Co 270,655 179,700 Guoco Group 1,004,779 1,251,600 Hang Lung Development Co Ltd 2,521,302 25,000 Harbour Centre Development Ltd 36,964 1,976,000 Henderson Investment Ltd 2,219,938 271,680 HKR International Ltd 410,467 288,600 Hon Kwok Land Investment 105,281 179,000 Hong Kong Ferry Co Ltd 340,941 835,287 Hong Kong Land Holdings 2,380,568 200,600 Hongkong Aircraft Engineering Co Ltd 635,941 500 Hongkong and Shanghai Hotels Ltd Preferred 1.95% 881 702,500 Hongkong Electric Holdings Ltd 2,431,173 304,600 Hysan Development Co Ltd 1,067,909 59,000 Innovative International 24,571 24,000 Jardine International Motor Holdings Ltd 30,992 47,400 Johnson Electric Holdings Ltd 130,987 66,477 Kantone Holdings Ltd * 9,872 597,000 Kumagai Gumi Hong Kong Ltd 682,264 382,000 Lai Sun Development 572,211 211,400 Lai Sun Garment International Ltd 308,474 105,000 Lane Crawford International Ltd Class B 12,474 20,000 Laws International Holdings Ltd 3,099 168,000 Leading Spirit Holdings 39,483 111,900 Liu Chong Hing Bank Ltd 212,413 196,000 Liu Chong Hing Investment Ltd 244,241 234,934 Mandarin Oriental 319,510 5,000 National Mutual Asia Ltd 5,456 137,300 New Asia Realty & Trust A Shares 499,095 528,815 New World Development Co Ltd 3,277,779 345,400 Oriental Press Group 143,842 65,300 Oriental Press Group Warrants 10/2/98 * 3,499 498,000 Paul Y ITC Construction Holdings Ltd 114,468 300 Peregrine Investments Holdings 548 161,000 Playmate Toys Holding 39,502 21,300 Realty Development Corp Ltd Class A 82,103 5,123,000 Regal Hotels International Ltd 1,521,552 18,000 San Miguel Brewery Ltd 7,554 154,000 Shaw Brothers Ltd 175,994 217,000 Shell Electric Co Ltd 141,510 1,041,000 Shun Tak Holdings Ltd 739,347
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Hong Kong - continued 721,100 Sino Land Co Ltd 828,744 1,538,972 South China Morning Post Ltd 1,381,180 428,000 Sun Hung Kai Properties Ltd 4,960,356 617,000 Sun Hung Kai & Co Ltd 163,333 134,600 Sun Hung Kai & Co Ltd Warrants 2/18/00 * 11,645 537,500 Swire Pacific Ltd Class B 732,260 406,500 Tai Cheung Holdings Ltd 367,446 132,000 Tem Fat Hing Fung 42,188 80,000 Texwinca Holdings Ltd 60,950 1,500 Union Bank of Hong Kong 2,324 476,000 Wharf Holdings Ltd 2,114,463 1,521,200 Wheelock & Co Ltd 4,095,690 38,580 Wing Lung Bank 275,251 364,000 Winsor Industrial Corp Ltd 88,838 88,050 Winsor Properties Holdings Ltd * 163,161 743,000 World Trade Centre Group Ltd 145,837 573,000 Yizheng Chemical Fibre Co 133,927 602,000 Yue Yuen Industrial Holding 244,873 ---------------- 55,478,312 ---------------- Italy - 4.1% 284,700 Alitalia Linee Aeree Italiane Class A * 102,762 6,000 Alleanza Assicurazioni di Risp (Non Convertible) 32,308 25,000 Alleanza Assicurazioni SPA 180,030 37,500 Ansaldo Transporti SPA * 38,609 11,000 Assicurazioni di Milano 30,592 108,250 Assicurazioni Generali SPA 1,966,435 318,600 Autostrade Concessioni e Costruzioni SPA Class B Preferred 6.39% 657,937 117,000 Banca Commerciale Italiana SPA 236,769 632,017 Banca di Roma * 464,102 265,718 Banca Fideuram SPA 669,798 23,334 Banca Nazionale dell'Agricoltura * 16,085 9,800 Banca Popolare di Bergamo Credit 145,550 76,000 Banca Popolare di Milano 415,976 26,800 Banca Toscana 50,746 31,000 Banco Ambrosiano Veneto SPA (Non Convertible) 57,047 24,000 Banco Ambrosiano Veneto SPA 61,065 193,096 Banco di Napoli di Risp * 86,836 6,000 Bulgari SPA 102,604 19,800 Caffaro SPA 18,992 53,900 Cartiere Burgo SPA 247,175 65,000 Cementir Cementerie del Tirreno SPA 41,731 180,600 Cia Italiana del Grandi Alberghi Cigahotels SPA * 84,209 59,600 COFIDE SPA (Non Convertible) * 15,517 215,500 COFIDE SPA * 90,536 123,455 Cogefar Impresit Costruzioni Generali SPA * 92,116 28,500 Comau Finanziaria SPA 86,849 75,000 Compart SPA * 33,062
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Italy - continued 37,500 Compart SPA * 18,839 147,500 Credito Italiano 201,612 303,700 Dalmine SPA * 67,209 1,900 Danieli and Co SPA 13,879 19,980 Danieli and Co SPA (Non Convertible) 76,137 207,000 Edison SPA 1,137,888 10,000 Editoriale L'Espresso SPA 33,728 4,900 Ericsson SPA 62,917 43,500 Falck Acciaierie and Ferriere Lombarde 192,919 73,000 Fiat SPA 225,479 385,000 Fiat SPA Preferred 646,982 536,700 Fiat SPA (Non Convertible) 908,262 97,184 Finmeccanica SPA * 43,187 13,000 Fondiaria SPA 49,923 325,600 Gemina * 184,764 122,500 Gilardini SPA 164,179 160,500 IFI Istituto Finanziario Preferred 2.46% 1,970,636 22,600 IFIL Finanziaria di Partecipazioni SPA 67,533 201,900 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 388,269 129,700 Industriali Riunite SPA (Non Convertible) * 53,108 268,200 Industriali Riunite SPA * 178,377 99,000 Istituto Bancario San Paolo 702,373 72,750 Istituto Mobilaire Italiano 635,379 912,892 Istituto Nazionale Delle Assicurazioni 1,193,782 7,375 Italcementi Fabbriche Riunite Cemento SPA 40,039 49,250 Italcementi Fabbriche Riunite Cemento SPA (Non Convertible) 119,774 13,300 Italgas SPA 47,416 5,100 Italmobiliare SPA 80,272 7,250 Luxottica Group Sponsored ADR 422,313 1,000 Marzotto and Figli SPA 7,692 54,000 Mediobanco SPA 352,598 11,425 Merloni Elettrodomestici SPA 25,385 11,392 Mondadori Editore 74,486 206,400 Montedison SPA (Non Convertible) * 139,228 1,789,200 Montedison SPA * 1,291,612 47,333 Montefibre SPA 29,100 297,400 Olivetti and Co SPA * 109,105 822,296 Parmalat Finanziaria SPA 1,131,265 126,033 Permafin Finanziaria * 37,288 58,400 Pirelli and Co 81,898 5,900 Pirelli and Co (Non Convertible) 7,244 15,000 Pirelli SPA 29,689 34,900 Pirelli SPA (Non Convertible) 53,899 24,000 RAS SPA 216,426 15,750 RAS SPA (Non Convertible) 85,274 2,500 Recordati Industria Chimica e Farmaceutica SPA (Non Convertible) 10,207
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Italy - continued 22,900 Rinascente per l'Esercizio di Grandi Magazzini SPA Preferred 5.59% 45,393 4,700 Rinascente per l'Esercizio di Grandi Magazzini SPA (Non Convertible) 11,444 12,800 SAFFA SPA * 30,750 1,400 SAFILO SPA 23,278 6,500 SAI 54,423 13,150 Saipem SPA 60,031 3,000 Sasib SPA 8,876 14,500 Sasib SPA (Non Convertible) 28,399 7,950 Sirti SPA 49,252 219,040 SMI (Societa Metallurgica Italy) * 97,596 29,300 Snia BPD SPA 29,231 34,600 Snia BPD SPA (Non Convertible) 25,796 20,000 Sopaf SPA 22,485 40,700 Stefanel SPA * 36,486 100,000 STET di Risp (Non Convertible) 349,704 140,146 Telecom Italia Mobile SPA (Non Convertible) 214,365 605,000 Telecom Italia Mobile SPA 1,584,098 413,300 Telecom Italia SPA 970,888 185,900 Telecom Italia SPA di Risp (Non Convertible) 374,000 4,000 Toro Assicurazioni 49,704 5,500 Unione Cementi Marchino Emiliane e di Augusta-Casale (Non Convertible) 14,450 500 Unione Cementi Marchino Emiliane e di Augusta-Casale 3,015 ---------------- 23,718,673 ---------------- Japan - 12.9% 6,000 77th Bank 48,968 21,000 Advantest Corp 1,186,677 2,000 Aida Engineering Ltd 13,058 14,000 Aisin Seiki Co Ltd 196,039 3,000 Aiwa Co 55,928 27,000 All Nippon Airways 195,302 5,000 Alps Electric Co Ltd 53,028 37,000 Amada Co Ltd 270,089 3,000 Amano Corp 30,077 7,000 Anritsu Corp 80,040 180,000 Aoki Corp * 259,508 2,000 Aoki International 36,457 8,000 Aoyama Trading 200,845 3,200 Arabian Oil Co Ltd 102,080 20,000 Asahi Breweries Ltd 193,885 35,000 Asahi Chemical Industries 189,369 30,000 Ashikaga Bank Ltd 100,174 2,000 Autobacs Seven 141,022 3,000 Bandai Co 61,894 15,000 Bank of Fukuoka Ltd 78,673 111,000 Bank of Tokyo-Mitsubishi 1,821,029 43,000 Bank of Yokohama Ltd 205,933
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Japan - continued 9,000 Banyu Pharmaceutical Co Ltd 131,245 15,400 Canon Sales Co Inc 298,583 14,000 Casio Computer Co 107,880 3,000 Chiba Bank Ltd 17,748 18,000 Chiyoda Corp * 95,451 13,000 Chubu Electric Power Co Inc 229,431 1,000 Chudenko Corp 28,586 28,000 Chugai Pharmaceutical Co Ltd 221,095 6,700 Chugoku Electric Power Co Inc 116,025 19,000 Citizen Watch Co 135,388 65,000 Cosmo Oil Co Ltd 253,128 8,000 Credit Saison Co 170,354 25,400 CSK Corp 604,010 84,000 Daicel Chemical Industries Ltd 361,919 11,000 Daido Steel Co Ltd 33,358 16,000 Daiei Inc 105,792 9,000 Daifuku Ltd 105,891 25,000 Daiichi Seiyaku Co Ltd 408,070 17,000 Daikin Industries Ltd 133,250 17,000 Daikyo Inc 64,090 5,000 Daimaru Inc 23,614 4,000 Dainippon Ink & Chemicals Inc 12,627 15,000 Dainippon Pharmaceutical Co Ltd 107,383 48,000 Dainippon Printing Co Ltd 799,403 42,000 Dainippon Screen Manufacturing Co Ltd 338,951 13,000 Daishowa Paper Manufacturing * 52,241 6,300 Daito Trust Construction Co Ltd 61,596 10,000 Daiwa House Industry Co Ltd 111,028 1,100 Denny's Japan Co Ltd 28,254 24,000 Denso Corp 461,347 132 East Japan Railway Co 562,168 9,000 Ebara Corp 113,348 16,000 Eisai Co Ltd 299,611 5,060 Familymart 194,535 9,600 Fanuc Co 298,285 20,000 Fuji Electric Co 82,525 56,000 Fuji Heavy Industries Ltd 266,799 20,000 Fuji Photo Film Co Ltd 669,484 4,000 Fuji Spinning Co Ltd 13,986 50,000 Fujikara Ltd 391,913 82,000 Fujisawa Pharmaceutical Co Ltd 713,398 1,000 Fujita Kanko Inc 11,020 6,000 Fujitec Co 55,183 187,000 Fujitsu Ltd 1,843,815 30,000 Furukawa Electric Co Ltd 139,448 17,000 Gakken Co Ltd 76,767
14 See accompanying notes to the financial statements. GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Japan - continued 14,000 General Sekiyu (KK) 84,680 24,000 Green Cross Corp 99,428 14,000 Gunma Bank Ltd 108,344 71,000 Hankyu Corp 340,616 7,000 Hankyu Department Stores Inc 62,640 4,000 Hanwa Co Ltd * 10,838 112,000 Haseko Corp * 217,151 16,000 Hazama-Gumi Ltd 35,794 4,000 Heiwa Corp 55,348 4,000 Higo Bank Ltd 22,537 6,000 Hino Motors 36,142 4,000 Hirose Electric 224,045 7,000 Hitachi Cable Ltd 47,328 208,000 Hitachi Ltd 1,792,361 4,000 Hitachi Maxell Ltd 80,205 14,000 Hitachi Metals Ltd 97,440 5,900 Hokkaido Electric Power 100,704 13,000 Hokuetsu Paper Mills 64,628 9,000 Hokuriku Bank Ltd 30,947 2,500 Hokuriku Electric Power 43,086 4,000 Honda Motor Co Ltd 123,623 5,000 Hosiden Corp * 34,427 3,000 House Foods Corp 41,760 11,000 Hoya Corp 468,473 16,000 INAX Corp 105,394 73,000 Industrial Bank of Japan 870,992 4,000 Intec Inc 47,394 3,000 Isetan Co Ltd 32,811 29,000 Ishihara Sangyo Kaisha * 67,040 38,000 Isuzu Motors Ltd 171,597 12,000 Ito-Yokado 544,867 4,000 Iwatani & Co 14,583 3,000 Japan Airport Terminal Co Ltd 30,574 3,000 Japan Aviation Electronics 17,549 134,000 Japan Energy Co Ltd 315,320 8,000 Japan Metals & Chemicals * 20,416 13,000 Japan Radio Co 124,948 73,000 Japan Synthetic Rubber Co Ltd 517,756 82 Japan Tobacco Inc 550,336 3,000 Japan Wool Textile 18,717 3,000 Jeol 17,748 12,000 JGC Corp 68,506 9,000 Joshin Denki Co Ltd 81,283 9,000 Joyo Bank 44,817 10,000 Kaken Pharmaceutical Co Ltd 51,620 17,000 Kamigumi Co Ltd 89,585
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Japan - continued 6,000 Kandenko Co 50,708 25,000 Kanebo Ltd * 43,293 9,000 Kaneka Corp 45,190 11,800 Kansai Electric Power 214,119 9,000 Kansai Paint Co Ltd 37,211 26,000 Kao Corp 284,365 4,000 Katokichi Co Ltd 64,297 27,000 Kawasaki Heavy Industry 111,857 38,000 Kawasaki Kisen * 77,455 20,000 Keihin Electric Express Railway Co Ltd 86,337 21,000 Kenwood Corp 89,610 2,000 Keyence Corp 243,599 11,000 Kikkoman Corp 59,334 8,000 Kinden Corp 104,068 101,000 Kinki Nippon Railway Co Ltd 606,720 31,000 Kirin Brewery Co Ltd 264,562 2,000 Kissei Pharmaceutical Co Ltd 39,937 60,000 Kobe Steel * 110,863 2,000 Kokusai Denshin Denwa 119,314 6,000 Kokusai Electric 92,965 11,000 Kokusai Kogyo Co Ltd 91,143 6,000 Kokuyo Co Ltd 128,262 4,000 Komori Corp 83,520 3,700 Konami Co Ltd 106,073 6,000 Konica Corp 36,092 5,000 Koyo Seiko Co Ltd 37,161 40,000 Kubota Corp 181,954 150,000 Kumagai Gumi Co Ltd 236,142 41,000 Kurabo Industries Ltd 102,593 5,000 Kurita Water Industries Ltd 105,643 12,000 Kyocera Corp 710,912 2,000 Kyodo Printing Co Ltd 14,865 11,000 Kyowa Exeo Corp 86,494 10,000 Kyowa Hakko Kogyo Co Ltd 66,368 3,000 Kyudenko Corp 22,869 11,300 Kyushu Electric Power Co Inc 195,683 5,000 Kyushu Matsushita Electric 54,686 12,000 Lion Corp 50,211 25,000 Long Term Credit Bank of Japan 90,107 1,500 Mabuchi Motor Co 74,696 14,000 Maeda Corp 85,028 7,000 Maeda Road Construction 59,740 7,000 Makino Milling Machine Co Ltd 49,126 5,000 Makita Corp 68,771 26,000 Marudai Food Co Ltd 112,023 59,000 Marui Co Ltd 845,720
16 See accompanying notes to the financial statements. GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Japan - continued 4,000 Maruichi Steel Tube 62,640 15,000 Matsushita Communications 393,985 95,000 Matsushita Electric Industrial Co Ltd 1,464,082 56,000 Matsushita Electric Works Ltd 491,839 8,000 Matsushita Kotubuki 228,685 104,000 Mazda Motor Corp * 303,323 10,000 Meidensha Corp 52,614 14,000 Meiji Milk Products Co Ltd 62,408 73,000 Minebea Co Ltd 603,646 32,000 Minolta Co Ltd 197,531 3,000 Misawa Homes 18,295 30,000 Mitsubishi Corp 278,399 116,000 Mitsubishi Electric Corp 651,653 61,000 Mitsubishi Gas Chemical Co Inc 223,399 45,000 Mitsubishi Materials Corp 167,040 24,000 Mitsubishi Motors 175,988 40,000 Mitsubishi Oil Co Ltd 166,377 16,000 Mitsubishi Paper Mills Ltd 59,392 15,000 Mitsubishi Rayon Co Ltd 54,437 29,000 Mitsubishi Steel Manufacturing * 99,718 3,000 Mitsubishi Warehouse & Transportation Co Ltd 34,800 15,000 Mitsui Fudosan Co Ltd 162,814 47,000 Mitsui Mining & Smelting Co Ltd 180,694 33,000 Mitsui OSK Lines * 65,623 17,000 Mitsui Petrochemical Industries Ltd 78,035 4,000 Mitsumi Electric Co Ltd 74,571 4,000 Mochida Pharmaceutical Co Ltd 33,474 11,000 Murata Manufacturing Co Ltd 385,533 15,000 Nachi Fujikoshi Co 44,991 10,000 Nagasakiya Co Ltd * 28,503 2,000 Nagase & Co 13,141 13,000 Nagoya Railroad Co Ltd 48,040 3,100 Namco Ltd 87,588 11,000 National House Industrial 133,068 22,000 Navix Line Ltd * 37,551 5,000 NCR Japan Ltd 38,736 82,000 NEC Corp 951,197 19,000 New Japan Securities Co Ltd * 58,406 40,000 New Oji Paper Co Ltd 222,719 5,000 NGK Insulators 45,571 22,000 NGK Spark Plug Co 226,034 9,000 Nichicon Corp 103,654 3,000 Nichido Fire & Marine Insurance Co Ltd 16,704 24,000 Nichiei Co Ltd 44,743 23,000 Nichii Co Ltd 295,385 26,000 Nihon Cement Co Ltd 123,871
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Japan - continued 32,000 Nikon Corp 469,302 17,900 Nintendo Co Ltd 1,262,151 45,000 Nippon Carbon Co Ltd * 124,907 11,000 Nippon Chemical 72,094 14,000 Nippon Comsys 154,280 5,000 Nippon Electric Glass Co 68,771 47,000 Nippon Express Co Ltd 302,585 6,000 Nippon Hodo Co 48,521 13,000 Nippon Kayaku Co Ltd 74,430 15,000 Nippon Light Metal 53,318 5,000 Nippon Meat Packers Inc 50,128 493,000 Nippon Oil Co Ltd 2,079,186 7,000 Nippon Oil & Fats 28,826 3,000 Nippon Paint Co 9,843 31,000 Nippon Paper Industries 145,381 5,000 Nippon Piston Ring Co Ltd 15,080 10,000 Nippon Shokubai Corp 63,800 21,000 Nippon Soda Chemical Co Ltd 153,120 11,000 Nippon Suisan Kaisha Ltd * 29,257 467 Nippon Telegraph & Telephone 3,323,830 1,000 Nippon Television Network 297,456 13,000 Nippon Yakin Kogyo Co Ltd 29,298 12,000 Nippon Zeon Ltd 50,012 21,000 Nishimatsu Construction 156,600 193,000 Nissan Motor Co Ltd 1,138,586 7,000 Nisshin Oil Mills Ltd 35,206 40,000 Nisshinbo Industries Inc 288,342 51,000 Nissho Iwai Corp 192,269 4,000 Nissin Food Products Co Ltd 76,560 3,000 Nitsuko Corp 19,960 17,000 Nitto Boseki Co Ltd 52,258 39,000 Nitto Denko Corp 520,259 37,000 NSK Ltd 212,147 24,000 NTN Corp 117,723 40,000 Odakyu Electric Railway Co Ltd 205,817 67,000 Oki Electric Industry 353,070 11,000 Okuma Corp 91,143 24,000 Okumura Corp 126,870 12,000 Olympus Optical Co Ltd 100,423 15,000 Omron Corp 236,142 14,000 Ono Pharmaceutical Co Ltd 450,079 24,000 Onoda Cement Co Ltd 84,315 7,000 Onward Kashiyama Co Ltd 85,840 18,000 Orient Corp 80,388 5,000 Orix Corp 211,285 25,000 Penta Ocean Construction 89,278
18 See accompanying notes to the financial statements. GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Japan - continued 33,000 Pioneer Electronics Corp 637,087 3,000 Q.P. Corp 22,620 110,000 Renown Inc * 218,742 54,000 Ricoh Co Ltd 635,347 2,000 Rinnai Corp 36,126 8,000 Royal Co Ltd 135,222 3,000 Ryobi Ltd 10,092 1,000 Ryosan Co 20,051 41,000 Sanden Corp 329,522 5,000 Sankyo Aluminum Industry Co Ltd 16,530 21,000 Sankyo Co Ltd 584,638 2,000 Sanrio Co Ltd * 12,594 11,000 Sanwa Shutter Corp 79,567 13,000 Sapporo Breweries Ltd 96,189 9,000 Sato Kogyo Co Ltd 20,134 5,500 Secom Co Ltd 309,882 12,000 Sega Enterprises 336,068 7,000 Seiko Corp 41,702 6,000 Seino Transportation Co Ltd 59,657 6,000 Seiyu 51,703 40,000 Sekisui Chemical Co Ltd 414,285 55,000 Sekisui House Ltd 510,399 10,000 Seven-Eleven Japan 601,541 5,600 Shikoku Electric Power 96,976 2,000 Shimachu Co 46,400 2,000 Shimano Inc 34,137 3,000 Shimadzu Corp 14,865 23,000 Shin-Etsu Chemical Co Ltd 444,030 22,000 Shionogi and Co Ltd 136,896 26,000 Shiseido Co Ltd 303,753 5,000 Shochiku Co Ltd 45,157 7,000 Shokusan Jutaku Sogo Co Ltd * 11,774 47,000 Showa Denko 103,198 28,000 Showa Shell Sekiyu 209,031 6,000 Skylark Co Ltd 86,503 3,000 SMC 204,077 6,000 Snow Brand Milk Products Co Ltd 29,182 4,000 Sony Corp 288,673 21,000 Stanley Electric Co Ltd 106,836 38,000 Sumitomo Complete Corp 285,575 6,000 Sumitomo Electric 83,023 14,000 Sumitomo Forestry Co Ltd 160,080 31,000 Sumitomo Heavy Industries Ltd 93,496 21,000 Sumitomo Osaka Cement Co Ltd 57,420 33,000 Sumitomo Realty and Development Co Ltd 231,593 10,000 Sumitomo Rubber Inc 65,871
See accompanying notes to the financial statements. 19 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Japan - continued 48,000 Suzuki Motor Corp 449,416 5,000 SXL Corp Ltd 31,527 18,000 Taisho Pharmaceutical Co Ltd 414,616 20,000 Taiyo Yuden Co Ltd 233,656 4,000 Takara Standard Co 29,862 12,000 Takashimaya Co 132,240 20,000 Takeda Chemical Industries Ltd 401,027 14,000 Takuma Corp 158,920 35,000 Tanabe Seiyaku Co Ltd 253,749 19,000 TDK Corp 1,272,019 94,000 Teijin Ltd 373,850 16,000 Teikoku Oil Co Ltd 75,300 1,000 Teikoku Sen-I Co Ltd * 4,549 5,000 Tekken Corp 19,761 26,000 Terumo Corp 379,153 56,000 Toa Nenryo Kogyo (KK) 566,078 24,000 Toagosei Chemical Industry Co Ltd 84,713 8,000 Toda Corp 45,936 2,000 Toei Co Ltd 12,462 100 Toho Co Ltd 13,091 10,300 Tohoku Electric Power Co Inc 176,659 9,000 Tokai Carbon Co Ltd 31,842 8,000 Tokyo Broadcasting System Inc 116,000 3,000 Tokyo Dome Corp 41,263 17,000 Tokyo Electric Co Ltd * 61,977 24,400 Tokyo Electric Power 452,863 6,000 Tokyo Gas Co 15,262 16,000 Tokyo Ink Manufacturing Co Ltd 60,585 31,000 Tokyo Steel Manufacturing Co 341,619 4,000 Tokyo Style Co Ltd 45,737 9,000 Tokyo Tatemono Co Ltd 39,150 1,000 Tokyotokeiba Co Ltd 2,734 49,000 Tokyu Construction Co Ltd 107,996 9,000 Tokyu Department Store Co Ltd 30,201 21,000 Tokyu Land Corp * 72,210 39,000 Toppan Printing Co Ltd 449,167 6,000 Toray Industries Inc 34,700 11,000 Toshiba Ceramics Co Ltd 85,674 128,000 Toshiba Corp 721,187 5,000 Toshiba Tungaloy Co Ltd 22,371 5,000 Tostem Corp 116,000 1,000 Toyo Exterior Co Ltd 13,671 6,000 Toyo Seikan Kaisha Ltd 140,691 3,000 Toyo Suisan Kaisha 27,591 26,000 Toyo Trust & Banking Co Ltd 185,699 9,000 Toyoda Auto Loom 155,854
20 See accompanying notes to the financial statements. GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Japan - continued 20,000 Toyota Motor Corp 512,056 7,000 Tsubakimoto Chain 36,482 11,000 Tsumura and Co 68,357 4,000 Ube Industries 11,169 1,000 Unicharm Corp 25,686 6,000 Uniden Corp 64,628 3,000 UNY Co Ltd 52,946 3,000 Ushio Inc 33,806 15,000 Victor Co of Japan Ltd 142,928 13,000 Wacoal Corp 131,411 6,000 Yakult Honsha Co Ltd 60,651 15,000 Yamaha Corp 285,856 9,000 Yamaha Motor Co 76,808 36,000 Yamanouchi Pharmaceutical Co Ltd 751,678 22,000 Yamato Transport Co Ltd 216,919 4,000 Yamazaki Baking Co Ltd 59,988 36,000 Yasuda Trust and Banking Co Ltd 97,837 10,000 Yodogawa Steel Works 57,171 2,000 Yokogawa Bridge Corp 16,903 18,000 Yokogawa Electric Corp 137,957 7,000 Yoshitomi Pharmaceutical Industries Ltd 47,676 ---------------- 74,167,000 ---------------- Malaysia - 5.4% 45,000 Aluminum Co Malaysia 72,130 192,000 Amalgamated Steel Mills Berhad 170,117 141,000 Amcol Holdings Ltd (b) 133,485 70,000 AMMB Holdings Berhad 659,686 62,000 Aokam Perdana Berhad * 133,588 56,000 Arab Malaysian Finance (Foreign Registered) 390,173 6,000 Ayer Hitam Tin Dredging * 13,653 311,000 Berjaya Group 433,371 179,000 Berjaya Industrial Berhad 286,919 184,000 Berjaya Leisure Berhad 515,022 187,500 Berjaya Sports Toto 1,087,394 18,600 Carlsberg Brew Malaysia 160,306 66,000 Cement Industries of Malaysia Berhad 200,685 26,000 DMIB Berhad 30,995 100,500 Edaran Otomobil Berhad 1,032,118 64,000 Ekran Berhad 229,400 29,300 Esso Malaysia Berhad 80,832 400 Faber Group Berhad * 512 55,000 Genting Berhad 374,346 79,000 Golden Hope Plantations Berhad 142,537 26,000 Golden Plus Holdings 67,016 28,000 Guinness Anchor Berhad 72,171 141,000 Highlands and Lowlands Berhad 252,130
See accompanying notes to the financial statements. 21 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Malaysia - continued 41,200 Hong Leong Industries Berhad 141,039 2,600 Hong Leong Industries Berhad Class A 8,901 194,000 Hong Leong Properties Berhad 359,404 29,000 Hume Industries Berhad 183,367 83,000 IJM Corp Berhad Class A 222,292 32,000 Innovest Berhad 121,788 195,000 IOI Corporation Berhad 351,832 33,000 Jaya Tiasa Holdings Berhad 180,749 55,000 Johan Holdings Berhad 59,364 60,000 Kedah Cement Berhad 116,472 21,000 Kelanamas Industries 44,402 132,000 Kemayan Corporation Berhad 198,824 28,000 Kian Joo Can Factory 131,937 45,000 Kuala Lumpur Kepong Berhad 135,924 8,000 Kuala Lumpur Kepong Berhad (Singapore) 23,562 149,200 Kumpulan Guthrie Berhad 259,583 115,000 Land & General Berhad 233,890 75,000 Landmark Berhad 134,716 185,000 Leader Universal Holdings 394,885 360,000 Magnum Corp Berhad 746,677 69,000 Malayan Cement Berhad 180,628 281,000 Malayan United Industries Berhad 256,895 40,000 Malayawata Steel 78,937 88,000 Malaysia Mining Corp Berhad 121,917 171,000 Malaysian Airline Systems 454,531 163,000 Malaysian Helicopter Berhad 231,075 149,200 Malaysian International Ship (Alien Market) 393,580 49,000 Malaysian Mosaics 85,252 21,000 Malaysian Oxygen Berhad 113,331 46,000 Malaysian Pacific Industries 190,818 38,666 Malaysian Plantations Rights 4/9/97 * 16,818 58,000 Malaysian Plantations 136,649 40,000 Malaysian Resources Corp 169,150 6,000 Matsushita Electric 58,719 305,000 MBF Capital Berhad 626,460 417,000 MBF Holdings Berhad 277,104 93,000 Metroplex Berhad 126,597 114,000 Mulpha International 123,963 205,000 Multi Purpose Holdings 487,112 24,000 Mycom Berhad 34,217 28,000 Nestle Malaysia 213,129 48,000 New Straits Times 305,437 136,900 Oriental Holdings Berhad 1,235,022 30,000 OYL Industries Berhad 292,388 170,100 Pan Malaysia Cement 202,777 121,000 Perlis Plantations 375,232
22 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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Malaysia - continued 224,000 Pernas International Hotel & Property 276,053 339,000 Perusahaan Otomobil 2,239,066 39,000 Petaling Garden Berhad 66,597 93,900 Petronas Dagangan Berhad 251,484 46,000 Petronas Gas Berhad 167,660 36,000 Pilecon Engineering Berhad 65,244 46,000 PJ Development Holdings 53,170 157,000 Promet Berhad * 177,676 375,666 Public Bank Berhad (Alien Market) 877,512 503,000 Renong Berhad 915,650 179,000 Resorts World Berhad 836,246 57,000 RJ Reynolds Berhad 156,101 8,000 Rothmans of Pall Mall Malaysia Berhad 82,964 293,000 Sarawak Enterprises Corp 559,331 47,400 Shell Refinery Co 152,718 58,000 Sime Darby 67,033 146,000 Sime Darby Berhad 552,718 8,600 Sime UEP Properties Berhad 23,206 31,000 Sistem Television Malaysia 63,673 77,000 Sungei Way Holdings 223,278 168,000 TA Enterprise Berhad 266,581 586,000 Tan Chong Motor Holdings Berhad 1,191,824 100,000 Technology Resources Industries 233,588 118,000 Telekom Malaysia 955,215 309,000 Tenaga Nasional 1,480,910 109,000 Time Engineering Berhad 245,832 46,000 Tractors Malaysia Holdings Berhad 96,335 184,000 UMW Holdings Berhad 970,761 22,000 Uniphone Telecommunications 30,656 121,000 Westmont Industries Berhad 246,093 109,000 YTL Corp 632,139 ---------------- 31,533,246 ---------------- Netherlands - 0.7% 700 ACF Holding NV 11,244 700 Cap Volmac Group NV 23,410 72,900 Elsevier NV 1,167,137 7,300 Fortis Amev NV 280,651 7,200 Getronics NV 235,096 3,800 Gist Brocades NV 128,681 32,308 ING Groep NV 1,250,599 2,800 Internatio-Muller 84,643 5,100 KLM Ltd 156,320 8,505 Kon Bolswessanen 149,156 7,050 Koninklijke KNP BT 161,139 1,878 Koninklijke Pakhoed 58,848 1,500 Nedlloyd 44,080
See accompanying notes to the financial statements. 23 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Netherlands - continued 5,600 Pirelli Tyre Holdings 57,510 900 Schroders Intl Prop Fund 1,851 3,900 Telegraaf Holdings CVA 85,854 19,200 VNU 397,388 ---------------- 4,293,607 ---------------- Norway - 1.0% 5,100 Aker AS Class A 130,175 7,600 Bergesen D Y AS Class A 157,896 5,300 Bergesen D Y AS Class B 110,898 248,500 Den Norske Bank AS Class A 1,106,313 1,300 Dyno Industrier AS 30,867 6,300 Elkem AS Class A 100,971 3,350 Kvaerner Industrier AS 164,552 6,100 Leif Hoegh and Co AS 117,680 61,600 Norsk Hydro AS 3,085,211 5,900 Norske Skogindustrier AS Class A 181,239 10,150 Nycomed ASA A Shares 158,156 9,900 Nycomed ASA B Shares 146,915 3,950 Orkla-Borregaard AS Class A 314,776 20,919 SAS Norge ASA Class B 207,992 1,700 Unitor AS 21,948 ---------------- 6,035,589 ---------------- Singapore - 1.5% 180,000 Chuan Hup Holdings Ltd 138,850 282,000 DBS Land Ltd 1,097,546 107,000 First Capital Corp Ltd 321,150 109,600 Fraser and Neave Ltd 983,787 14,000 Goodman Fielder Asia Holdings Ltd 24,250 221,000 Hai Sun Hup Group Ltd 164,278 95,000 Haw Paw Brothers International Ltd 221,178 9,500 Haw Paw Brothers International Ltd Warrants 7/18/2001 * 9,194 8,000 Highlands and Lowlands Berhad 14,530 167,000 Hotel Properties Ltd 295,119 31,000 Inchcape Berhad 108,261 279,441 Jardine Matheson Holdings Ltd 1,690,618 482,500 Jardine Strategic Holdings Ltd 1,582,600 40,000 Jurong Shipyard Ltd 190,743 77,000 Lum Chang Holdings Ltd 72,356 24,000 Metro Holdings Ltd 78,429 306,000 Neptune Orient Lines Ltd 263,941 11,000 Prima Ltd 38,261 27,000 Robinson and Co Ltd 110,764 15,400 Shangri-La Hotel Ltd 48,597 19,000 Singapore Land Ltd 107,258 161,000 Straits Trading Co Ltd 397,419 21,000 Times Publishing Ltd 46,830
24 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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Singapore - continued 36,000 United Engineers 62,356 648,000 United Industrial Corp Ltd 558,934 97,000 United Overseas Land Ltd 155,091 31,000 Wearne Brothers Ltd 84,783 ---------------- 8,867,123 ---------------- Spain - 2.8% 20,292 Argentaria Corporacion Bancaria de Espana SA 812,529 21,792 Autopistas Concesionaria Espanola SA (Registered) 243,231 230 Azucarera de Espana SA 10,846 39,511 Banco Bilbao Vizcaya SA 2,329,040 13,636 Banco Central Hispanoamericano SA 361,471 1,628 Bankinter SA 217,483 9,165 Dragados y Construcciones SA 138,738 4,145 Empresa Nacional de Electricidad SA 253,008 5,375 Ercros SA * 3,487 214 Fabricacion de Automoviles Renault de Espana SA 4,105 131,897 FENOSA SA 1,044,319 44,854 Fuerzas Electricas de Cataluna SA 358,269 10,759 General Aguas de Barcelona SA 412,797 269,696 Iberdrola SA 2,944,362 5,890 Prosegur Compania (Registered) 63,276 68,690 Repsol SA 2,611,514 7,161 Sarrio SA 26,026 46,612 Sevillana de Electricidad 422,711 8,101 Tabacalera SA Class A 366,763 9,552 Tableros Defibras Class B 92,288 154,114 Telefonica de Espana SA 3,547,794 2,700 Telefonica de Espana SA ADR 185,963 4,700 Uralita SA 36,885 ---------------- 16,486,905 ---------------- Sweden - 5.8% 14,345 Assi Doman 372,108 8,900 Autoliv AB 404,756 27,000 Avesta Sheffield AB 273,669 85,900 Bilspedition AB Class B * 319,629 25,496 Celsius Industrier AB Class B 491,347 772 Custos AB Series Class A 17,915 4,400 Custos AB Series Class B 101,812 60,800 Electrolux AB Class B 3,802,990 14,547 Esselte AB Class A 352,127 9,200 Esselte AB Class B 223,310 10,474 Euroc Industri AB Class A 389,732 1,108 Fastighets AB (Hufvudstaden) Class A 8,201 7,900 Hennes and Mauritz AB Class B 1,123,138 4,609 Industrivarden AB Class A 231,738
See accompanying notes to the financial statements. 25 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Sweden - continued 1,765 Industrivarden AB Class C (Bearer) 84,741 13,500 Kinnevik Investment Class B 382,597 23,700 Marieberg Tidnings AB Class A 657,447 100,800 Mo Och Domsjo AB Class B 3,199,531 29,600 Nordbanken 1,073,765 2,600 Perstorp AB Class B 46,812 4,100 Skandia Group Foersaekrings AB 124,672 170,400 Skandinaviska Enskilda Banken Class A 1,795,335 96,205 Skanska AB Class B 4,246,923 10,700 SKF AB Class B 255,438 89,900 Sparbanken Sverige AB Class A 1,774,476 40,800 Ssab Swedish Steel Class A 693,776 14,700 Ssab Swedish Steel Class B 249,963 52,423 Stena Line AB Class B 248,898 177,000 Stora Kopparberg Bergslags Class A 2,419,613 33,900 Stora Kopparberg Bergslags Class B 458,896 131,100 Svenska Cellulosa Class B 2,911,157 33,600 Svenska Handelsbanken Class A 941,038 2,800 Svenska Kullagerfabriken AB 66,097 1,001 Sydkraft AB Class A 22,695 83,100 Telefonaktiebologet LM Ericsson Class B 2,643,250 61,700 Trelleborg AB Class B 966,878 523 Trygg Hansa Holdings AB B Free 11,021 4,050 Volvo AB Class A 100,736 19,500 Volvo AB Class B 488,924 ---------------- 33,977,151 ---------------- Switzerland - 1.6% 25 Adia SA (Bearer) 8,102 26,095 Alberta Energy Ltd 548,856 300 Alusuisse Lonza Holdings (Bearer) 234,508 60 Bobst SA (Bearer) 81,193 21 Danzas Holding AG (Registered) 22,495 765 Elektrowatt AG (Bearer) 275,400 80 Fischer (George) AG (Bearer) 81,627 500 Hilti AG, Schaan (Participating Certificate) 315,254 306 Holderbank Financiere Glarus AG (Bearer) 227,788 1,870 Holderbank Financiere Glarus AG (Registered) 280,183 50 Interdiscount Holdings (Bearer) * 556 50 Kuoni Reisen Holdings AG (Registered) 131,525 5 Magazine zum Globus (Registered) 2,441 310 Merkur Holding AG (Registered) 65,363 638 Novartis AG (Bearer) 730,132 3,306 Novartis AG (Registered) 3,778,926 3,944 Novartis Rights 3/12/97 * 249,608 25 Schindler Holding AG (Participating Certificate) 27,966 25 Schindler Holding AG (Registered) 26,610 10 Schweizerische Rueckversicherungsgesellschaft (Bearer) 10,231
26 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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- Switzerland - continued 280 Sika Finanz AG (Bearer) 69,478 648 SMH AG (Bearer) 369,031 800 SMH AG (Registered) 105,356 105 Sulzer Gebrueder AG (Registered) 65,492 6,950 Swiss Bank Corp (Registered) 1,319,322 ---------------- 9,027,443 ---------------- United Kingdom - 24.8% 9,800 3 Group Plc 81,382 38,400 Allied Colloids 80,505 271,500 Allied Domecq Plc 1,929,057 186,490 AMEC 362,068 14,310 Amersham International 302,341 95,740 Amstrad Plc 298,342 75,100 Anglian Water Plc 793,966 25,633 Argos Plc 286,887 175,400 Arjo Wiggins Appleton Plc 463,587 2,794,900 ASDA Group 5,107,065 39,300 Ashley (Laura) Holdings 100,986 150,200 Associated British Foods 1,190,949 46,400 Associated British Ports Holdings Ltd 237,325 23,200 Astec (BSR) 54,505 222,900 Bank of Scotland 1,241,904 135,390 Barratt Development 612,966 408,990 Bass 5,705,134 44,800 BAT Industries 392,500 11,700 BBA Group 65,474 127,300 Beazer Holmes Plc 415,380 15,800 Berisford International 35,315 2,484,800 BG Plc 6,911,987 9,662 BICC 43,507 48,100 Blue Circle Industries 312,723 48,170 Booker Plc 269,561 62,200 BPB Industries Plc 347,059 102,325 British Aerospace 2,128,944 85,981 British Airways 884,453 5,770 British Land Co 50,364 405,000 British Petroleum 4,489,847 492,100 British Steel 1,204,292 1,471,400 British Telecom Plc 10,216,667 115,750 BTR 454,175 11,043 Bunzl Co 37,925 24,280 Burmah Castrol Plc 409,597 766,920 Burton Group 1,958,175 82,800 Caradon 368,791 11,750 Carlton Communications 100,068 2,484,800 Centrica Plc * 2,655,338 150 Charter Plc (Registered) 1,806 4,500 Chubb Security 31,349
See accompanying notes to the financial statements. 27 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- United Kingdom - continued 341,682 Coats Viyella 719,116 6,300 Cobham Group Plc 60,283 173,104 Cookson Group 660,861 61,100 Cordiant Plc * 97,442 23,086 Costain Group (b) 16,949 31,000 Courtaulds 184,098 51,100 Courtaulds Textiles Plc 206,757 35,149 Dalgety Plc 188,094 147,848 Dawson International 166,438 200 De La Rue Plc 2,030 29,600 Delta 169,506 75,400 Electrocomponents Plc 493,906 3,247 Energy Group Plc * 27,653 246,277 English China Clays Plc 859,854 225,900 Enterprise Oil 2,292,417 348,800 Eurotunnel SA Units (Registered) * 432,491 47,990 FKI 146,413 17,254 General Electric 104,999 50,190 Glaxo Wellcome Plc 850,785 29,870 Granada Group 450,292 338 Grand Metropolitan 2,509 29,370 Great Portland Estates Plc 101,105 91,656 Greenalls Group Plc 834,415 7,200 Greycoat Plc 18,795 400 Guinness 2,989 6,300 Hambros 26,724 4,058 Hanson Plc 18,207 166,550 Harrisons & Crosfield 358,679 126,603 Hazlewood Foods 245,798 4,100 Hepworth 17,526 412,844 Hillsdown Holdings 1,286,490 33,000 Hyder Plc 446,868 3,900 ICI 48,167 3,247 Imperial Tobacco Group Plc * 22,514 2,925 Inchcape 12,694 154,277 Kingfisher 1,704,029 31,610 Kwik Save Group 157,552 1,221,791 Ladbroke Group 4,584,710 24,223 Laing (John) 119,745 300 Laird Group 1,760 800 Laporte Plc 8,392 1,052,600 Lasmo 4,138,734 283,675 Legal & General Group 1,809,610 32,590 Lex Service 185,565 262,600 Lloyds TSB Group 2,185,003 141,500 London International 385,532 690,903 Lonrho 1,623,180 120,559 Lucas Variety Plc * 402,235
28 See accompanying notes to the financial statements. GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- United Kingdom - continued 172,276 Marley 348,525 58,600 Meggitt 101,342 16,300 Mercury Asset Management 358,480 52,100 Meyer International 341,705 91,100 MFI Furniture Group 291,314 463 Millennium Chemicals Inc 8,855 315,609 Mirror Group Plc 1,078,749 46,500 National Grid Holdings Plc 157,040 535,593 National Power 4,292,641 55,800 Next 541,674 12,907 NFC Plc 36,219 173,909 Norcros Plc 261,034 91,000 Northern Foods Plc 316,234 40,490 Ocean Group 310,149 321,400 Orange Plc 1,111,652 526,900 Peninsular & Oriental Steam Navigation Co 5,733,781 764,714 Pilkington 1,809,065 11,000 Powell Duffryn 73,222 115,659 Powergen 1,166,152 13,000 Premier Farnell Plc 104,563 192 Racal Electronics 908 67,100 Railtrack Group Plc 495,368 58,573 Reckitt & Colman 761,628 88,710 Redland 503,662 207,700 Rentokil Plc 1,528,270 220,000 Reuters Holdings 2,358,170 27,900 Rexam Plc 147,936 1,200 RMC Group 18,648 143,323 Rolls-Royce 542,489 17,661 Royal & Sun Alliance Insurance 141,764 76,800 Rugby Group 136,576 37,697 Safeway Plc 222,640 16,400 Sainsbury (J) 82,678 400 Salvesen (Christian) 2,092 133,516 Scottish Hydro-Electric Plc 775,501 396,942 Scottish Power Plc 2,266,638 41,200 Scottish & Newcastle Plc 455,065 985,012 Sears 1,301,708 106,400 Securicor Plc 543,342 24,600 Sedgwick Group 50,570 72,061 Severn Trent Plc 838,256 39,007 Shell Transport & Trading (Registered) 661,219 63,700 Siebe Plc 1,006,009 236,085 Signet Group Plc * 123,255 127,020 Simon Engineering 87,038 9,970 Slough Estates 46,196 29,274 Smith & Nephew Plc 92,178 184,464 Smithkline Beecham Plc 2,759,739
See accompanying notes to the financial statements. 29 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------- United Kingdom - continued 5,160 Smiths Industries 64,991 83,300 Southern Electric Plc 1,076,359 29,700 Southwest Water 332,405 173,930 Storehouse Plc 777,521 412,195 T & N 1,096,169 1,361,340 Tarmac 2,243,236 21,200 Tate & Lyle 150,976 369,466 Taylor Woodrow Plc 1,151,317 492,464 Tesco 2,715,678 123,700 Thames Water 1,386,480 4,200 Thistle Hotels Plc * 14,116 31,800 TI Group Plc 273,417 203,900 Tomkins Plc 948,089 84,400 Transport Development Group 282,282 14,770 Unigate 110,124 42,788 Unilever 1,100,533 264,052 United Biscuits 1,033,922 17,600 United News & Media Plc 203,298 336,800 United Utilities 3,643,113 28,900 Vendome Luxury Group Plc Units 248,011 37,000 Vickers 162,987 101,630 Vodafone Group Plc 482,505 89,200 Waste Management International * 343,450 90,970 Wessex Water Plc 534,303 251,070 Whitbread Plc Class A 3,219,619 27,300 Willis Corroon Group Plc 68,146 93,635 Wilson (Connolly) Holdings 239,842 412,175 Wimpey (George) 948,174 5,435 Wolseley 41,765 46,200 Yorkshire Electricity Group 673,101 45,656 Yorkshire Water 535,567 ---------------- 144,007,612 ---------------- TOTAL STOCK AND EQUIVALENTS (Cost $526,586,465) 550,480,734 ---------------- Par Value ($)/ SHORT-TERM INVESTMENTS - 12.6% Shares Cash Equivalents - 10.5% $ 14,400,000 Republic Bank of New York Time Deposit, 5.34% due 3/3/97 14,400,000 46,489,322 The Boston Global Investment Trust (c) 46,489,322 ---------------- 60,889,322 ---------------- U.S. Government - 2.1% $ 13,000,000 U.S. Treasury Bill, 5.56% due 1/8/98 (a) 12,405,904 ---------------- TOTAL SHORT-TERM INVESTMENTS (Cost $73,296,143) 73,295,226 ---------------- TOTAL INVESTMENTS - 107.3% (Cost $599,882,608) * * 623,775,960 Other Assets and Liabilities (net) - (7.3%) (42,676,875) ---------------- TOTAL NET ASSETS - 100.0% $ 581,099,085 ================
30 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 28, 1997 - -------------------------------------------------------------------------------- Notes to the Schedule of Investments: ADR American Depositary Receipt (a) This security is held as collateral for open futures contracts. (b) Valued by management (Note 1). (c) Represents investment of security lending collateral (Note 1). * Non-income producing security. A dividend has not been declared for the year ended February 28, 1997. ** The aggregate identified cost for federal income tax purposes is $601,292,268, resulting in gross unrealized appreciation and depreciation of $48,651,009 and $26,167,317, respectively, and net unrealized appreciation of $22,483,692. See accompanying notes to the financial statements. 31 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997 - -------------------------------------------------------------------------------- At February 28, 1997, industry sector diversification of the Fund's equity investments was as follows:
Industry Sector (Unaudited) Banking 8.1 % Utilities 7.0 Services 6.4 Conglomerates 6.0 Oil and Gas 5.5 Construction 5.3 Real Estate 5.2 Consumer Goods 5.0 Telecommunications 4.6 Transportation 4.6 Retail Trade 4.3 Chemicals 4.1 Food and Beverage 3.6 Machinery 3.6 Electronic Equipment 3.4 Health Care 3.0 Automotive 2.7 Paper and Allied Products 2.7 Metals and Mining 2.3 Communications 2.3 Insurance 2.1 Financial Services 1.3 Aerospace 1.1 Computers 0.6 Textiles 0.6 Miscellaneous 4.6 =================== 100.0% ===================
32 See accompanying notes to the financial statements. GMO Currency Hedged International Core Fund (A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1997 - ---------------------------------------------------------------------------------------------- Assets: Investments, at value (cost $599,882,608)(Note 1) $ 623,775,960 Foreign currency, at value (cost $6,188,600)(Note 1) 6,166,261 Cash 72,046 Dividends and interest receivable 507,914 Foreign withholding taxes receivable 327,876 Receivable for investments sold 2,254,352 Receivable for open forward foreign currency contracts (Note 6) 19,815,413 Receivable for expenses waived or borne by Manager (Note 2) 327,064 --------------- Total assets 653,246,886 --------------- Liabilities: Payable for investments purchased 5,337,815 Payable for open forward foreign currency contracts (Note 6) 18,394,863 Payable upon return of securities loaned (Note 1) 46,489,322 Payable for Fund shares repurchased 707,000 Payable for variation margin on open futures contracts (Notes 1 and 6) 429,744 Payable to affiliate for (Note 2): Management fee 334,997 Shareholder service fee 66,999 Accrued expenses 387,061 --------------- Total liabilities 72,147,801 --------------- Net assets $ 581,099,085 =============== Net assets consist of: Paid-in capital $ 510,898,081 Accumulated undistributed net investment income 31,487,338 Accumulated undistributed net realized gain 14,851,199 Net unrealized appreciation 23,862,467 --------------- $ 581,099,085 =============== Net assets attributable to Class III Shares $ 581,099,085 =============== Shares outstanding - Class III 45,811,127 =============== Net asset value per share - Class III $ 12.68 ===============
See accompanying notes to the financial statements. 33 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Statement of Operations - Year Ended February 28, 1997 - --------------------------------------------------------------------------------
Investment income: Dividends (net of foreign tax expense of $1,353,462) $ 11,592,957 Interest (including securities lending income of $115,347) 3,648,473 --------------- Total income 15,241,430 --------------- Expenses: Management fee (Note 2) 3,841,815 Custodian fees 1,149,274 Stamp duties and transfer taxes 156,678 Audit fees 67,677 Registration fees 39,892 Legal fees 26,662 Transfer agent fees 25,491 Trustees fee (Note 2) 2,505 Miscellaneous 3,612 Fees waived or borne by Manager (Note 2) (2,218,152) --------------- 3,095,454 Shareholder service fee - Class III (Note 2) 595,691 --------------- Net expenses 3,691,145 --------------- Net investment income 11,550,285 --------------- Realized and unrealized gain (loss): Net realized gain (loss) on: Investments 23,020,912 Closed futures contracts (845,223) Closed swap contracts 1,412,223 Foreign currency, forward contracts and foreign currency related transactions 32,630,755 --------------- Net realized gain 56,218,667 --------------- Change in net unrealized appreciation (depreciation) on: Investments 13,411,825 Open futures contracts (1,033,373) Foreign currency, forward contracts and foreign currency related transactions (798,312) --------------- Net unrealized gain 11,580,140 --------------- Net realized and unrealized gain 67,798,807 --------------- Net increase in net assets resulting from operations $ 79,349,092 ===============
34 See accompanying notes to the financial statements. GMO Currency Hedged International Core Fund (A Series of GMO Trust) Statement of Changes in Net Assets - --------------------------------------------------------------------------------
Year Ended Period Ended Increase (decrease) in net assets: February 28, 1997 February 29, 1996 * ------------------- -------------------- Operations: Net investment income $ 11,550,285 2,761,612 Net realized gain 56,218,667 9,472,130 Change in net unrealized appreciation (depreciation) 11,580,140 12,282,327 ------------------ ---------------- Net increase in net assets resulting from operations 79,349,092 24,516,069 ------------------ ---------------- Distributions to shareholders from: Net investment income - Class III (12,206,199) (1,491,247) Net realized gains - Class III (18,177,235) (1,789,497) ------------------ ---------------- (30,383,434) (3,280,744) ------------------ ---------------- Net share transactions - Class III (Note 5) 124,906,849 385,991,253 ------------------ ---------------- Total increase in net assets 173,872,507 407,226,578 Net assets: Beginning of period 407,226,578 - ------------------ ---------------- End of period (including accumulated undistributed net investment income of $31,487,338 and $6,114,326, respectively) $ 581,099,085 407,226,578 ================== ================
* Period from June 30, 1995 (commencement of operations) to February 29, 1996. See accompanying notes to the financial statements. 35 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Financial Highlights (For a Class III share outstanding throughout each period) - --------------------------------------------------------------------------------
Year Ended Period Ended February 28, 1997 February 29, 1996* --------------------- --------------------- Net asset value, beginning of period $ 11.54 $ 10.00 --------------------- --------------------- Income from investment operations: Net investment income 0.22 0.23 Net realized and unrealized gain (loss) 1.63 1.44 --------------------- --------------------- Total from investment operations 1.85 1.67 --------------------- --------------------- Less distributions to shareholders from: Net investment income (0.28) (0.06) Net realized gains (0.43) (0.07) --------------------- --------------------- Total distributions (0.71) (0.13) --------------------- --------------------- Net asset value, end of period $ 12.68 $ 11.54 ===================== ===================== Total Return (a) 16.55% 16.66% Ratios/Supplemental Data: Net assets, end of period (000's) $ 581,099 $ 407,227 Net expenses to average daily net assets 0.72% (c) 0.69% ** Net investment income to average daily net assets 2.25% 1.89% ** Portfolio turnover rate 84% 7% Average broker commission rate per equity share (b) $ 0.0067 N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.04 $ 0.05
* Period from June 30, 1995 (commencement of operations) to February 29, 1996. ** Annualized. (a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. The average broker commission rate will vary depending on the markets in which trades are executed. (c) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .03% of average daily net assets. 36 See accompanying notes to the financial statements. GMO Currency Hedged International Core Fund (A Series of GMO Trust) Notes to Financial Statements February 28,1997 - -------------------------------------------------------------------------------- 1. Significant accounting policies The GMO Currency Hedged International Core Fund (the "Fund"), which commenced operations on June 30, 1995, 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 into classes. The Fund seeks maximum total return through investment in a portfolio of common stocks of non-U.S. issuers and through management of the Fund's foreign currency positions. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. At February 28, 1997, Class III was the only active class of shares of the Fund. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 37 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 net exchange gains and losses on disposition of foreign currencies, 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 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 purchase of 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 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 held as of February 28, 1997. 38 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 28, 1997. 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 equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return based on a notional amount. 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, 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 is 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 28, 1997. 39 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 28, 1997, the Fund loaned securities having a market value of $40,234,543 collateralized by cash in the amount of $46,489,322, 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to the differing treatments for foreign currency and passive foreign investment company transactions. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital --------------------------- ------------------------ -------------------------- $26,028,926 ($26,028,905) ($21)
40 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 in such a manner as deemed equitable by the Trustees, 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 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. Prior to June 1, 1996, the premium on cash purchases was .75% of the amount invested. All purchase premiums are paid to and recorded as paid-in capital by the Fund. For the year ended February 28, 1997, the Fund received $266,701 in purchase premiums. There is no premium for cash redemptions or reinvested distributions. 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 and the possible imposition of currency exchange blockages 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. 41 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 2. Fees and other transactions with affiliates GMO earns a management fee paid monthly at the annual rate of .75% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .54% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .69%; thus, the net annual expense ratio after the waiver for a Class III shareholder is unchanged. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997, was $2,505. 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 28, 1997, aggregated $638,371,793 and $370,931,104, respectively. 4. Principal shareholder At February 28, 1997, 23% of the outstanding shares of the Fund were held by one shareholder. 42 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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:
Class III: Period from June 30, 1995 Year Ended (commencent of operations) to February 28, 1997 February 29, 1996 --------------------------------------------- ---------------------------------------------- Shares Amount Shares Amount --------------------- -------------------- --------------------- --------------------- Shares sold 16,351,665 $ 195,574,666 35,069,613 $ 383,683,337 Shares issued to shareholders in reinvestment of distributions 2,179,223 26,037,897 253,567 2,801,916 Shares repurchased (7,998,316) (96,705,714) (44,625) (494,000) --------------------- -------------------- --------------------- --------------------- Net increase 10,532,572 $ 124,906,849 35,278,555 $ 385,991,253 ===================== ==================== ===================== =====================
43 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 6. Financial instruments A summary of outstanding financial instruments at February 28, 1997 is as follows: Forward currency contracts
Net Unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) ---------------- ---------------------------- ------------------ --------------------- ------------------ Buys 3/3/97 ATS 48,800,000 $ 4,107,329 $ 933 5/9/97 ATS 193,909,467 16,381,777 (528,788) 6/13/97 ATS 131,213,831 11,108,054 (204,946) 3/7/97 AUD 3,303,719 2,564,033 (44,914) 5/9/97 AUD 1,263,424 979,229 7,997 7/11/97 AUD 3,303,719 2,559,336 1,498 3/7/97 BEF 561,923,767 16,137,612 (1,937,865) 5/7/97 BEF 390,375,000 11,241,167 (377,552) 5/12/97 BEF 30,761,720 886,055 (39,945) 7/11/97 BEF 561,923,767 16,245,313 (101,151) 3/3/97 CAD 22,586,200 16,523,667 (458,439) 3/7/97 CAD 5,135,450 3,757,979 (4,366) 4/9/97 CAD 682,000 500,069 984 5/9/97 CAD 4,488,290 3,297,638 (64,314) 6/13/97 CAD 3,984,417 2,933,761 (43,239) 7/11/97 CAD 22,586,200 16,659,152 (52,798) 3/7/97 CHF 3,031,802 2,056,072 (307,896) 5/9/97 CHF 20,924,246 14,279,759 (613,701) 7/11/97 CHF 3,031,802 2,083,365 940 3/3/97 DEM 11,000,000 6,516,009 11,751
44 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward currency contracts - continued Buys - continued
Net Unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) ---------------- ---------------------------- ------------------ --------------------- ------------------ 3/7/97 DEM 74,100,618 $ 43,902,706 $ (4,961,990) 5/9/97 DEM 2,257,663 1,342,626 (43,698) 7/11/97 DEM 74,100,618 44,257,768 (20,266) 3/3/97 DKK 19,463,970 3,022,215 4,077 3/7/97 DKK 5,186,232 805,401 (87,930) 7/11/97 DKK 5,186,232 810,601 (965) 3/3/97 ESP 25,500,000 177,886 (23,313) 3/7/97 ESP 285,347,700 1,990,439 (6,257) 5/9/97 ESP 435,133,120 3,030,133 (104,719) 6/13/97 ESP 2,246,913,574 15,641,318 (272,682) 7/11/97 ESP 25,500,000 177,504 (1,117) 3/3/97 FIM 5,500,000 1,092,386 (7,174) 3/7/97 FIM 1,670,108 331,772 (36,906) 5/9/97 FIM 10,125,280 2,018,500 (64,677) 7/11/97 FIM 1,670,108 334,425 (742) 3/7/97 FRF 41,824,000 7,342,375 (8,064) 3/7/97 GBP 3,594,363 5,863,894 108,781 5/9/97 GBP 8,998,008 14,657,214 73,263 7/11/97 GBP 3,594,363 5,848,339 (5,080) 3/3/97 HKD 410,000,000 52,944,215 6,836 3/7/97 HKD 240,621,576 31,071,571 (16,603) 5/9/97 HKD 16,151,933 2,085,014 (2,986) 7/11/97 HKD 84,352,356 10,885,636 (2,614) 3/7/97 IEP 6,081,740 9,630,718 (23,287) 5/9/97 IEP 2,942,405 4,655,267 (51,404) 7/11/97 IEP 869,619 1,375,913 2,436 3/3/97 ITL 11,400,000,000 6,745,562 (522,556)
45 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward currency contracts - continued Buys - continued
Net Unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) ---------------- ---------------------------- ------------------ --------------------- ------------------ 3/7/97 ITL 21,277,125,000 $ 12,587,892 $ (97,451) 6/13/97 ITL 35,064,965,576 20,637,626 (870,374) 7/11/97 ITL 7,500,000,000 4,409,996 (45,008) 3/3/97 JPY 780,764,200 6,469,170 (640,967) 5/9/97 JPY 1,094,192,060 9,150,232 (261,768) 7/11/97 JPY 780,764,200 6,588,620 78,725 3/3/97 MYR 35,300,000 14,216,673 38,828 3/7/97 MYR 10,823,411 4,358,442 8,546 5/9/97 MYR 32,310,630 12,975,740 49,420 3/3/97 NLG 7,850,000 4,134,190 (15,955) 3/7/97 NLG 6,924,341 3,647,376 (469) 5/9/97 NLG 1,727,045 913,168 (33,937) 6/13/97 NLG 4,997,577 2,648,675 (54,325) 3/3/97 NOK 103,800,000 15,403,907 (1,019,165) 3/7/97 NOK 60,878,131 9,035,830 (34,848) 6/13/97 NOK 111,552,121 16,638,467 (568,533) 7/11/97 NOK 86,800,000 12,967,404 (110,794) 3/3/97 NZD 6,250,000 4,323,438 (16,563) 3/7/97 NZD 11,364,915 7,860,053 (34,364) 6/13/97 NZD 20,927,540 14,381,080 99,080 3/3/97 SEK 25,000,000 3,334,200 (453,679) 3/7/97 SEK 53,462,907 7,130,935 (27,710) 6/13/97 SEK 4,671,192 624,984 (9,016) 7/11/97 SEK 25,000,000 3,348,889 (15,170) 3/3/97 SGD 1,400,000 981,767 1,306 3/7/97 SGD 7,070,152 4,957,956 5,829 ------------------ $ (14,853,810) ==================
46 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward currency contracts - continued
Net Unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) ---------------- ---------------------------- ------------------ --------------------- ------------------ Sales 3/3/97 ATS 48,800,000 $ 4,107,329 $ 526,477 4/9/97 ATS 364,253,753 30,733,837 1,994,246 7/11/97 ATS 48,800,000 4,142,644 (7,016) 3/7/97 AUD 3,303,719 2,564,033 (2,197) 4/9/97 AUD 33,000,000 25,612,620 (1,320) 5/9/97 AUD 1,360,142 1,055,280 2,720 6/13/97 AUD 6,205,310 4,813,156 (92,156) 3/7/97 BEF 561,923,767 16,137,612 85,873 5/7/97 BEF 245,300,000 7,075,064 188,780 3/3/97 CAD 22,586,200 16,523,667 41,203 3/7/97 CAD 5,135,450 3,757,979 32,021 5/9/97 CAD 12,981,750 9,542,864 191,355 7/11/97 CAD 5,135,450 3,790,016 1,384 3/7/97 CHF 3,031,802 2,056,072 (612) 5/9/97 CHF 70,200,195 47,945,975 1,919,066 3/3/97 DEM 11,000,000 6,516,009 822,217 3/7/97 DEM 74,100,618 43,902,706 21,786 5/9/97 DEM 67,414,061 40,108,843 1,198,840 6/13/97 DEM 65,519,282 39,072,749 425,251 7/11/97 DEM 11,000,000 6,573,039 (16,443) 3/3/97 DKK 19,463,970 3,022,215 361,646 3/7/97 DKK 5,186,232 805,410 791 5/9/97 DKK 13,946,880 2,173,542 68,001 6/13/97 DKK 54,978,323 8,584,192 133,808 7/11/97 DKK 19,463,970 3,043,777 (5,902) 3/3/97 ESP 25,500,000 177,886 936 3/7/97 ESP 285,347,700 1,990,439 224,151
47 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward currency contracts - continued Sales - continued
Net Unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) ---------------- ---------------------------- ------------------ --------------------- ------------------ 7/11/97 ESP 285,347,700 $ 1,987,950 $ 6,052 3/3/97 FIM 5,500,000 1,092,386 128,480 3/7/97 FIM 1,670,108 331,772 482 7/11/97 FIM 5,500,000 1,103,256 5,615 3/7/97 FRF 41,824,000 7,342,375 657,625 5/9/97 FRF 194,159,911 34,223,935 989,807 7/11/97 FRF 41,824,000 7,403,054 157 3/7/97 GBP 3,594,363 5,863,894 3,184 5/9/97 GBP 85,535,240 139,421,585 (1,612,355) 6/13/97 GBP 13,953,245 22,730,201 (49,201) 3/3/97 HKD 410,000,000 52,944,215 54,751 3/7/97 HKD 240,621,576 31,071,571 21,037 7/11/97 HKD 566,269,220 73,092,995 (16,730) 3/7/97 IEP 6,081,740 9,630,718 343,193 5/9/97 IEP 2,060,404 3,262,917 73,083 7/11/97 IEP 5,212,121 8,255,348 (13,108) 3/3/97 ITL 11,400,000,000 6,745,562 319,338 3/7/97 ITL 21,277,125,000 12,587,892 1,240,556 5/9/97 ITL 24,420,593,000 14,403,606 814,968 7/11/97 ITL 25,177,125,000 14,817,090 98,414 3/3/97 JPY 780,764,200 6,469,170 (77,322) 4/9/97 JPY 1,684,985,400 14,038,971 524,114 5/9/97 JPY 10,276,849,990 86,004,502 (514,913) 6/13/97 JPY 428,936,200 3,607,366 (65,366) 3/3/97 MYR 35,300,000 14,216,673 (254,723) 3/7/97 MYR 10,823,411 4,358,442 (82,442) 5/9/97 MYR 19,515,279 7,841,303 (30,756) 6/13/97 MYR 51,400,306 20,630,008 (106,008)
48 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward currency contracts - continued Sales - continued
Net Unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) ---------------- ---------------------------- ------------------ --------------------- ------------------ 7/11/97 MYR 46,123,411 $ 18,496,370 $ (52,567) 3/3/97 NLG 7,850,000 4,134,190 553,777 3/7/97 NLG 6,924,341 3,647,371 405,324 4/9/97 NLG 9,413,880 4,971,887 409,933 5/9/97 NLG 42,674,933 22,584,492 767,725 7/11/97 NLG 14,774,341 7,853,568 6,811 3/3/97 NOK 103,800,000 15,403,907 107,055 3/7/97 NOK 60,878,131 9,035,830 398,020 5/9/97 NOK 41,461,815 6,180,932 211,504 7/11/97 NOK 43,878,131 6,564,203 17,648 3/3/97 NZD 6,250,000 4,323,438 107,813 3/7/97 NZD 11,364,915 7,860,053 25,419 5/9/97 NZD 15,552,181 10,719,495 (30,237) 7/11/97 NZD 17,614,915 12,099,156 110,569 3/3/97 SEK 25,000,000 3,334,200 12,610 3/7/97 SEK 53,462,907 7,130,935 770,066 5/9/97 SEK 376,407,413 50,342,980 1,631,130 7/11/97 SEK 53,462,907 7,169,047 21,660 3/3/97 SGD 1,400,000 981,767 21,314 3/7/97 SGD 7,070,152 4,957,956 56,336 6/13/97 SGD 19,538,218 13,771,938 158,061 7/11/97 SGD 8,470,152 5,981,126 (8,449) ------------------ $ 16,274,360 ==================
49 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Currency Abbreviations ATS Austrian Schilling GBP British Pound AUD Australian Dollar HKD Hong Kong Dollar BEF Belgian Franc IEP Irish Pound CAD Canadian Dollar ITL Italian Lira CHF Swiss Franc JPY Japanese Yen DEM German Mark MYR Malaysian Ringgit DKK Danish Krona NLG Netherlands Guilder ESP Spanish Peseta NOK Norwegian Kroner FIM Finnish Markka NZD New Zealand Dollar FRF French Franc SEK Swedish Krona SGD Singapore Dollar
Futures Contracts
Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) ---------------- ---------------------------- ------------------ --------------------- ------------------ Buys 2 DAX March 1997 $ 386,329 $ 10,354 2 IBEX 35 March 1997 73,680 (3,707) 241 MIB 30 March 1997 24,733,160 2,131,792 133 OMX STOCK March 1997 3,642,463 (88,134) 186 TOPIX March 1997 21,483,470 (2,426,098) 148 TSE 35 March 1997 17,658,439 703,749 ------------------ $ 327,956 ================== Sales 358 ALL ORDS March 1997 $ 16,860,355 $ (305,029) 220 HANG SENG March 1997 18,849,432 297,050 140 MATIF CAC 40 March 1997 12,895,933 (1,713,033) 2 FTSE 100 ID March 1997 349,549 (13,234) ----------------- $ (1,734,246) =================
At February 28, 1997, the Fund has cash and/or securities to cover any margin requirements on open futures contracts. 50 GMO Currency Hedged International Bond Fund (A Series of GMO Trust) Federal Income Tax Information on Distributions - (Unaudited) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all the Fund's distributions are from investment company taxable income, except that the Fund has designated 3.9% of distributions as net capital gain dividends. 51 GMO Currency Hedged International Core Fund (A Series of GMO Trust) Portfolio Managers - ------------------ Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. Management Discussion and Analysis of Fund Performance - ------------------------------------------------------ The Class III shares of the GMO Currency Hedged International Core Fund returned 16.6% for the fiscal year ended February 28, 1997 as compared to 17.9% for the GMO EAFE-Lite Hedged Index. Consistent with the Fund's investment objective and policies, the Fund was invested substantially in common stocks throughout the period. With the exception of Japan and Singapore, the majority of the EAFE countries experienced strong performance during the year. The Japanese market declined by - -8.8% in local terms, while EAFE ex-Japan rose by 25.6%. These returns were depressed somewhat for U.S. investors as a result of the dollar's rally during the period, 7.6% versus an EAFE-Lite basket of currencies. Relative to the GMO EAFE-Lite Index, the impact of the Fund's country weights negatively impacted performance for the year , in spite of a modest underweight in Japan. The primary influence was the Fund's underwriting of the Netherlands, an expensive market which strongly outperformed the index during the year. Additionally, underweighting in France and Germany and an overweighting in Singapore contributed negatively as well. These results were partially offset by the positive impact of the Fund's underweighting of Japan and overweighting of Canada, Italy and Spain. Relative to EAFE, country selection added value, primarily due to the Fund's underweight in Japan. Effect of Currency weights The effect of the Fund's currency weights added value to the account's relative performance, primarily from underweighting the yen, Swiss franc and Dutch guilder. The Fund also benefited from an overweight position in the pound sterling, which was the strongest performing currency for the year. The Fund was modestly hedged back to the U.S. dollar during the year, which added value as well. Effect of stock selection Stock selection contributed negatively to the Fund's performance for the year. Growth stocks led the strong performance in many of the developed international markets, while value-based investing lagged. International small capitalization stocks outperformed modestly, following on very weak performance in 1995. Portfolio structure and outlook Country selection. We modestly favor Canada, Italy, Singapore and Spain and are underweight in Japan and the major European countries (Germany, the U.K., France and Switzerland). We also continue to underweight the Netherlands, which following its strong run this year, looks even more expensive to us than it has been in the past. Stock selection. Over time we have gradually broadened the techniques used by the International Core Fund to select stocks. From the simple value screens we began using successfully fifteen years ago, today value includes a proprietary price-to-dividend discount measure. We expect that the use of the dividend discount model, which focuses on value stocks while giving companies credit for financial and operating "quality," will enable the portfolio to be most responsive to opportunities for a valued-based strategy in a more competitive investing environment. We have diversified the techniques used to select stocks in the portfolio to include momentum screens which allow the portfolio to own selected growth stocks with attractive characteristics. As a result, we expect the portfolio to be more flexible than it has been previously, weathering those periods when value investing is out of favor. Further, the Fund's stock selection models have been customized to add value on a country by country basis. Today the portfolio is positioned to be flexible to style shifts in the international markets. Value remains at the heart of our approach, however, as the staying power of growth and momentum-based techniques tends to be more limited than value investing and reversals tend to be more severe. 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 Core Fund Class III shares and the MSCI EAFE Index As of February 28, 1997 Average Annual Total Return
Since Inception 1 Year 5 Year 06/30/95 Class III 15.9% N/A 19.8%
[LINE GRAPH APPEARS HERE]
Date GMO Currency Hedged International Core Fund MSCI EAFE Index GMO EAFE-Lite Hedged Index 06/30/95 9,925 10,000 10,000 02/29/96 11,596 10,324 11,878 02/28/97 13,515 10,745 14,009
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 60bp on the purchase. Transaction fees are paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Class I shares and Class II shares have not commenced operations. Past performance is not indicative of future performance. Information is unaudited. GMO Global Bond Fund (A Series of GMO Trust) Annual Report February 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 22, 1997 GMO Global Bond Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 28, 1997
Par Value Description Value ($) DEBT OBLIGATIONS - 89.0% Argentina - 1.4% USD 1,000,000 Republic of Argentina Bocon Pro 1, PIK, Variable Rate, 1 mo. Peso Deposit Rate (3.22%), due 4/01/07 1,030,000 ---------------- Brazil - 0.9% USD 837,030 Brazil Capitalization Bond, PIK, 8.00% due 4/15/14 662,822 ---------------- Bulgaria - 0.3% USD 500,000 Bulgaria FLIRB Series B, Variable Rate, Step up (2.75%), due 7/28/12 226,250 ---------------- Canada - 2.3% CAD 2,000,000 Government of Canada Real Return, 4.25% due 12/01/21 1,608,867 ---------------- Denmark - 5.4% DKK 15,400,000 Kingdom of Denmark Bullet, 7.00% due 12/15/04 2,538,012 DKK 7,600,000 Kingdom of Denmark, 8.00% due 11/15/01 1,320,143 ---------------- 3,858,155 ---------------- Ecuador - 0.3% USD 500,000 Republic of Ecuador Par Bond, Variable Rate, Step up (3.25%), due 2/28/25 225,000 ---------------- France - 9.8% FRF 23,650,000 Credit Foncier, 6.50% due 10/13/08 4,339,964 ECU 1,000,000 Government of France, 8.25% due 4/25/22 1,354,686 ECU 1,000,000 Societe Nationale des Chemins de Fer, 9.38% due 3/12/01 1,326,523 ---------------- 7,021,173 ---------------- Germany - 1.1% ESP 100,000,000 Deutsche Ausgleichsbank, 8.60% due 5/22/03 758,633 ---------------- Greece - 1.4% GRD 250,000,000 Hellenic Republic, Variable Rate, 12 mo. GTB + 1.50% (14.20%), due 9/30/03 983,114 ---------------- Jordan - 0.5% USD 500,000 Hashemite Kingdom of Jordan Par Bond, Variable Rate, Step up (4.00%), due 12/23/23 144A 332,500 ---------------- Mexico - 1.0% FRF 5,000,000 Mexico Par Bond, 6.63% due 12/31/19 715,251 ---------------- New Zealand - 0.5% NZD 500,000 New Zealand Index Linked Bond, 4.50% due 2/15/16 327,706 ----------------
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 28, 1997
Par Value Description Value ($) Nigeria - 0.5% USD 500,000 Central Bank of Nigeria Par Bond, Variable Rate, Step up (6.25%), due 11/15/20 338,750 ---------------- Spain - 1.6% ESP 150,000,000 Government of Spain, 10.25% due 11/30/98 1,117,754 ---------------- Supranational - 3.9% JPY 85,000,000 Asian Development Bank, 5.00% due 2/5/03 822,956 GBP 1,000,000 International Bank Recon and Development, 11.50% due 11/09/03 1,982,273 ---------------- 2,805,229 ---------------- Sweden - 7.1% SEK 5,000,000 Government of Sweden Index Linked Bond, 4.00% due 12/1/20 682,906 SEK 10,200,000 Kingdom of Sweden, 13.00% due 6/15/01 1,740,969 SEK 13,300,000 Kingdom of Sweden, 10.25% due 5/5/03 2,149,292 SEK 4,000,000 Kingdom of Sweden, 6.00% due 2/9/05 517,571 ---------------- 5,090,738 ---------------- United States - 50.4% Asset Backed Securities - 29.5% USD 5,000,000 Augusta Funding Series 1996-F2, Variable Rate, LIBOR + .30% (5.89%), due 4/15/06 144A 4,951,465 USD 438,626 BCI Home Equity Loan 1994-1 Class A1 Variable Rate, 1 mo. LIBOR + .24% (5.99%), due 3/29/44 440,008 USD 4,000,000 Discover Card Master Trust I Series 1996-2A, Variable Rate, 1 mo. LIBOR +.22% (5.64%), due 7/18/05 4,008,000 USD 3,000,000 Eagle Pier Corp BV, Variable Rate, 6 mo. LIBOR + .25% (6.00%), due 10/03/01 3,015,000 USD 2,000,000 First Chicago Master Trust II 95-0, Variable Rate, 1 mo. LIBOR + .23% (5.65%), due 2/15/04 2,007,500 USD 4,000,000 National Premier Finance 95-2, 6.21% due 6/01/99 144A 3,992,000 USD 2,000,000 National Premier Finance IX 96-1A, 7.20% due 7/01/00 2,032,000 USD 651,489 Wilshire Liquidating Trust Series 1996-1 144A Class 1, Variable Rate, 1 mo. LIBOR + .50% (6.00%), due 9/25/01 649,860 ---------------- 21,095,833 ---------------- Structured Notes - 9.7% USD 5,000,000 Federal Home Loan Bank, Variable Rate, (10.00% - 6 mo. LIBOR)(4.18%), due 9/22/03 4,237,500 USD 2,750,000 Federal Home Loan Bank, Variable Rate, ((.50 * 10YR CMT) + 1.25%)(4.71%), due 3/16/98 2,701,100 ---------------- 6,938,600 ---------------- U.S. Government - 2.9% USD 1,000,000 U.S. Treasury Note, 6.875% due 8/31/99 (a) 1,016,250 USD 1,000,000 U.S. Treasury Note, 9.25% due 8/15/98 1,045,000 ---------------- 2,061,250 ----------------
2 See accompanying notes to the financial statements. GMO Global Bond Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Par Value Description Value ($) U.S. Government Agency - 8.3% USD 4,000,000 Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10% (5.47%), due 2/01/27 4,016,250 USD 1,928,000 Ship Co 668, Series A, 8.50%, due 5/11/02 1,929,928 ---------------- 5,946,178 ---------------- Total United States 36,041,861 ---------------- Venezuela - 0.6% USD 500,000 Republic of Venezuela Discount Bond Series A, Variable Rate, 6 mo. LIBOR + .81% (6.44%), due 3/31/20 431,250 ---------------- TOTAL DEBT OBLIGATIONS (Cost $64,332,821) 63,575,053 ---------------- Principal Amount CALL OPTIONS PURCHASED - 2.4% (000's omitted) Cross Currency Options - 1.9% DEM 40,600 DEM Call/BEF Put, Expires 4/11/97 Knock Out 20.50, Strike 20.50 158,725 ECU 11,700 ECU Call/DEM Put, Expires 5/14/97 Knock Out 1.894, Strike 1.894 294,536 ECU 39,400 ECU Call/DEM Put, Expires 6/13/97 Knock Out 1.9075, Strike 1.9075 695,206 ECU 20,200 ECU Call/DEM Put, Expires 7/24/97 Knock Out 1.915, Strike 1.92 211,301 ---------------- 1,359,768 ---------------- Options on Bonds - 0.4% USD 2,000 Brazil Discount Z, Expires 4/25/97 Strike 73.00 177,500 SEK 35,000 Sweden Government Bond 1033, Expires 4/11/97 Strike 117.725 136,161 ---------------- 313,661 ---------------- Options on Currency - 0.1% USD 4,000 German Mark, Expires 2/9/98 Strike 1.61 102,000 ---------------- TOTAL CALL OPTIONS PURCHASED (Cost $1,347,784) 1,775,429 ---------------- PUT OPTIONS PURCHASED - 2.7% Cross Currency Options - 0.5% DEM 17,400 DEM Put/ITL Call, Expires 1/21/98 Strike 950.00 41,227 DEM 23,400 DEM Put/ITL Call, Expires 3/18/97 Strike 1025.00 311,871 ---------------- 353,098 ---------------- Options on Bonds - 0.0% USD 500 Venezuela Discount Bond, Expires 7/10/97 Strike 88.25 less DCB offer 1,645 ---------------- Options on Currency - 2.2% USD 16,900 French Franc, Expires 6/30/97 Strike 5.195 1,368,900 USD 4,000 German Mark, Expires 2/9/98 Strike 1.61 190,400 ---------------- 1,559,300 ---------------- TOTAL PUT OPTIONS PURCHASED (Cost $804,908) 1,914,043 ----------------
See accompanying notes to the financial statements. 3 GMO Global Bond Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Par Value Description Value ($) SHORT-TERM INVESTMENTS - 4.6% Repurchase Agreement - 4.6% $ 3,253,041 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97 with a maturity value of $3,254,356 and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $3,321,624 (Cost $3,253,041). 3,253,041 ---------------- TOTAL INVESTMENTS - 98.7% (Cost $69,738,554) * * 70,517,566 Other Assets and Liabilities (net) - 1.3% 896,744 ---------------- TOTAL NET ASSETS - 100.0% $ 71,414,310 ================
Notes to the Schedule of Investments: DCB - Debt Conversion Bond GTB - Greek Treasury Bill PIK - Payment In Kind CMT - Constant Maturity Treasury Index Knock Out - Option will expire if underlying security reaches knock out price. 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. Variable and step up rates - The rates shown on variable and step up rate notes are the current interest rates at February 28, 1997, which are subject to change based on the terms of the security. (a) All or a portion of this security is held as collateral for open futures contracts. ** The aggregate identified cost for federal income tax purposes is $69,748,316, resulting in gross unrealized appreciation and depreciation of $2,342,385 and $1,573,135, respectively, and net unrealized appreciation of $769,250. Currency Abbreviations AUD - Australian Dollar GBP - British Pound BEF - Belgian Franc GRD - Greek Drachma CAD - Canadian Dollar ITL - Italian Lira CHF - Swiss Franc JPY - Japanese Yen DEM - German Mark NLG - Netherlands Guilder DKK - Danish Krone NZD - New Zealand Dollar ECU - European Currency Unit SEK - Swedish Krona ESP - Spanish Peseta USD - United States Dollar FRF - French Franc 4 See accompanying notes to the financial statements. GMO Global Bond Fund (A Series of GMO Trust) Statement of Assets and Liabilities - February 28, 1997 - ----------------------------------------------------------------------------- Assets: Investments, at value (cost $69,738,554) (Note 1) $ 70,517,566 Cash 7,572 Foreign currency, at value (cost $501,224) (Note 1) 475,101 Interest receivable 1,303,937 Receivable for expenses waived or borne by Manager (Note 2) 24,122 Receivable for open forward foreign currency contracts (Note 6) 2,418,300 --------------- Total assets 74,746,598 --------------- Liabilities: Written options outstanding, at value (premiums $369,400) (Note 6) 330,400 Payable to brokers for open futures contracts (Notes 1 and 6) 98,292 Payable for open forward foreign currency contracts (Note 6) 2,815,386 Payable to affiliate for (Note 2): Management fee 19,400 Shareholder service fee 8,379 Accrued expenses 60,431 --------------- Total liabilities 3,332,288 --------------- Net assets $ 71,414,310 =============== Net assets consist of: Paid-in capital $ 70,139,724 Accumulated undistributed net investment income 1,195,168 Accumulated undistributed net realized gain 60,126 Net unrealized appreciation 19,292 =============== $ 71,414,310 =============== Net assets attributable to: Class I shares $ 646,038 =============== Class III shares $ 70,768,272 =============== Shares outstanding: Class I 63,643 =============== Class III 6,963,365 =============== Net asset value per share: Class I $ 10.15 =============== Class III $ 10.16 ===============
See accompanying notes to the financial statements. 5 GMO Global Bond Fund (A Series of GMO Trust) Statement of Operations - Year Ended February 28, 1997 - --------------------------------------------------------------------------------
Investment income: Dividends from investment company shares $ 49,248 Interest (including securities lending income of $11,172) 4,139,789 Total income 4,189,037 Expenses: Management fee (Note 2) 220,921 Audit fees 82,358 Custodian and transfer agent fees 62,010 Registration fees 8,608 Legal fees 2,166 Trustees fee (Note 2) 323 Miscellaneous 628 Fees waived or borne by Manager (Note 2) (237,243) ------------ 139,771 Shareholder service fee (Note 2) Class I 264 Class III 74,110 ------------ Net expenses 214,145 ------------ Net investment income 3,974,892 ------------ Realized and unrealized gain (loss): Net realized gain (loss) on: Investments 1,329,551 Realized gain distributions from investment company shares 94,121 Closed futures contracts 1,759,653 Written options 22,586 Foreign currency, forward contracts and foreign currency related transactions (149,616) ------------ Net realized gain 3,056,295 ------------ Change in net unrealized appreciation (depreciation) on: Investments 1,253,798 Open futures contracts (311,242) Written options 39,000 Foreign currency, forward contracts and foreign currency related transactions (617,131) ------------ Net unrealized gain 364,425 ------------ Net realized and unrealized gain 3,420,720 ------------ Net increase in net assets resulting from operations $ 7,395,612 ============
6 See accompanying notes to the financial statements. GMO Global Bond Fund (A Series of GMO Trust)
Statement of Changes in Net Assets - ---------------------------------------------------------------------------------------------------------------------- Year Ended February 28, 1997 February 29, 1996 * ------------------ ------------------- Increase (decrease) in net assets: Operations: Net investment income $ 3,974,892 $ 304,686 Net realized gain (loss) 3,056,295 (414,636) Change in net unrealized appreciation (depreciation) 364,425 (345,133) ---------------- ------------------ Net increase (decrease) in net assets resulting from operations 7,395,612 (455,083) ---------------- ------------------ Distributions to shareholders from: Net investment income Class III (3,484,400) -- Net realized gains Class III (2,181,543) -- ---------------- ------------------ (5,665,943) -- ---------------- ------------------ Net share transactions: (Note 5) Class I 654,817 -- Class III 37,957,406 31,527,501 ---------------- ------------------ Net increase in net assets resulting from Fund share transactions 38,612,223 31,527,501 ---------------- ------------------ Total increase in net assets 40,341,892 31,072,418 Net assets: Beginning of period 31,072,418 -- ---------------- ------------------ End of period (including accumulated undistributed net investment income of $1,195,168 and $145,359, respectively) $ 71,414,310 $ 31,072,418 ================ ==================
* Period from December 28, 1995 (commencement of operations) to February 29, 1996. See accompanying notes to the financial statements. 7 GMO Global Bond Fund (A Series of GMO Trust) Financial Highlights (For a Class I share outstanding throughout the period)
Period from January 6, 1997 (commencement of operations) to February 28, 1997 Net asset value, beginning of period $ 10.29 ---------- Income from investment operations: Net investment income 0.09 Net realized and unrealized gain (loss) (0.23) ---------- Total from investment operations (0.14) ---------- Net asset value, end of period $ 10.15 ========== Total Return (a) (1.36)% Ratios/Supplemental Data: Net assets, end of period (000's) $ 646 Net expenses to average daily net assets 0.47% * Net investment income to average daily net assets 6.05% * Portfolio turnover rate 72% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.01
* Annualized. (a) Calculation excludes purchase premiums. The total return would have been lower had certain expenses not been waived during the period shown. See accompanying notes to the financial statements. 8 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, ---------------------------------- 1997 1996* ------------- ------------- Net asset value, beginning of period $ 9.89 $ 10.00 ------------- ------------- Income from investment operations: Net investment income 0.61 0.05 Net realized and unrealized gain (loss) 0.59 (0.16) ------------- ------------- Total from investment operations 1.20 (0.11) ------------- ------------- Less distributions to shareholders: From net investment income (0.57) 0.00 From net realized gains (0.36) 0.00 ------------- ------------- Total distributions (0.93) 0.00 ------------- ------------- Net asset value, end of period $ 10.16 $ 9.89 ============= ============= Total Return (a) 12.01% (1.10%) Ratios/Supplemental Data: Net assets, end of period (000's) $ 70,768 $ 31,072 Net expenses to average daily net assets 0.34% 0.34%** Net investment income to average daily net assets 6.31% 6.16%** Portfolio turnover rate 72% 0% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.04 $ 0.01
* Period from December 28, 1995 (commencement of operations) to February 29, 1996. ** Annualized (a) Calculation excludes purchase premiums. The total return would have been lower had certain expenses not been waived during the period shown. See accompanying notes to the financial statements. 9 GMO Global Bond Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1997 - -------------------------------------------------------------------------------- 1. Significant accounting policies The GMO Global Bond Fund (the "Fund"), which commenced operations on December 28, 1995, 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 into classes. The Fund seeks high total return by investing primarily in investment grade bonds denominated in various currencies including U.S. dollars and multicurrency units. The Fund generally seeks to provide a total return greater than that provided by the global fixed income securities market. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 10 GMO Global Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 investments in 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. 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 net exchange gains and losses on disposition of foreign currencies, 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 purchase of 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 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 held as of February 28, 1997. 11 GMO Global Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 28, 1997. Options The Fund may write call and put options on securities it owns or in which it may invest. 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 transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price 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. See Note 6 for all open written option contracts as of February 28, 1997. The Fund may also purchase put and call options. 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. The risk associated with purchasing put and call options is limited to the premium paid. 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. 12 GMO Global Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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. Security lending The Fund may lend its securities to certain member firms of the New York Stock Exchange. 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 28, 1997, there were 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for foreign currency transactions. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments. 13 GMO Global Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - --------------------------------------------------------------------------------
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ------------------------- --------------------------- -------------------- $559,317 ($559,317) -
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. 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 in such a manner as deemed equitable by the Trustees, 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 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 .15% of the amount invested. Effective June 1, 1996, the Manager will reduce such premium only when any portion of a purchase is offset by a corresponding redemption occurring on the same day. All purchase premiums are paid to and recorded as paid-in capital by the Fund. For the year ended February 28, 1997, the Fund received $61,270 in purchase premiums. There is no premium for cash redemptions, reinvested distributions or in-kind transactions. 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 and the possible imposition of currency exchange blockages 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. 14 GMO Global Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .19% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .34%; thus the net annual expense ratio after the waiver for a Class III shareholder is unchanged. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997, was $323. 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 28, 1997, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Proceeds ----------------- ----------------- U.S. Government securities $ 7,003,336 $ 998,281 Investments (non-U.S. Government securities) 66,547,596 40,054,116
4. Principal shareholders At February 28, 1997, 100% of the outstanding Class I shares of the Fund were held by one shareholder and 93% of the outstanding Class III shares of the Fund were held by four shareholders, each holding in excess of 10% of the outstanding shares of the respective class. 15 GMO Global Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 January 6, 1997 (commencement of operations) to February 28, 1997 ------------------------------------------------ Class I: Shares Amount ------------------- -------------------- Shares sold 63,643 $ 654,817 Shares issued to shareholders in reinvestment of distributions - - Shares repurchased - - ------------------- -------------------- Net increase 63,643 $ 654,817 =================== ====================
Period from December 28, 1995 Year Ended (commencent of operations) to February 28, 1997 February 29, 1996 ---------------------------------------- ------------------------------------------ Class III: Shares Amount Shares Amount ----------------- ------------------- ------------------- ------------------ Shares sold 4,047,314 $ 40,339,699 3,143,053 $ 31,527,501 Shares issued to shareholders in reinvestment of distributions 435,009 4,467,251 - - Shares repurchased (662,011) (6,849,544) - - ----------------- -------------- ------------------- -------------- Net increase 3,820,312 $ 37,957,406 3,143,053 $ 31,527,501 ================= ============== =================== ==============
16 GMO Global Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 6. Financial instruments A summary of outstanding financial instruments at February 28, 1997 is as follows: Forward currency contracts
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ------------------- ------------------- ---------------------- ------------------ --------------------- Buys 4/24/97 CAD 3,300,000 $ 2,423,308 $ (30,078) 3/7/97 DEM 74,400,000 44.089,377 (2,314,052) 4/18/97 GBP 1,700,000 2,770,988 24,718 4/10/97 JPY 1,500,000,000 12,502,429 (193,718) --------------------- $ (2,513,130) ===================== Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ------------------- ------------------- ---------------------- ------------------ --------------------- Sales 5/23/97 AUD 2,400,000 $ 1,860,955 $ (25,675) 4/24/97 CAD 6,300,000 4,626,315 67,241 3/7/97 DEM 42,800,000 25,363,244 2,057,815 4/18/97 GBP 1,600,000 2,607,989 31,485 4/10/97 JPY 310,000,000 2,583,835 32,727 3/21/97 NZD 475,000 328,189 5,403 -------------------- $ 2,168,996 ====================
17 GMO Global Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Forward cross currency contracts
Net Unrealized Settlement Appreciation Date Deliver/Units of Currency Receive/In Exchange for (Depreciation) --------------- -------------------------------- ------------------------------ ------------------- 3/20/97 ITL 17,759,498,500 DEM 17,800,000 $ 59,961 7/23/97 DEM 8,500,000 ESP 719,325,000 (74,679) 7/23/97 ESP 50,790,000 DEM 600,000 5,173 4/28/97 DEM 77,880,978 ECU 40,200,000 2,684 3/20/97 DEM 13,800,000 ITL 14,027,932,000 106,789 4/25/97 DEM 3,100,000 FRF 10,460,420 (288) 4/25/97 FRF 16,544,703 DEM 4,900,000 (1,393) 3/14/97 NLG 15,928,211 DEM 14,200,000 22,168 5/7/97 DEM 26,600,000 SEK 119,182,450 (144,746) 4/15/97 BEF 74,212,920 DEM 3,600,000 2,136 5/5/97 DEM 6,000,000 CHF 5,191,500 (24,493) 3/14/97 DEM 6,300,000 NLG 7,082,460 (1,549) 5/6/97 DKK 30,177,210 DEM 7,900,000 (2,871) 4/28/97 ECU 15,500,000 DEM 30,027,375 (1,844) ------------------- $ (52,952) ===================
18 GMO Global Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Futures contracts
Net Unrealized Number of Appreciation Contracts Type Expiration Date Contract Value (Depreciation) --------------- ----------------------------------- ---------------------- --------------------- ---------------- Buys 29 Australian Government Bond 3 YR March 1997 $ 2,648,380 $ (11,001) 34 Australian Government Bond 10YR March 1997 3,502,716 (72,854) 51 CAD Government Bond June 1997 5,590,221 (41,619) 19 Italian Government Bond 10 YR June 1997 2,882,127 (54,327) 50 MATIF ECU Bond March 1997 6,042,426 116,711 19 MATIF ECU Bond June 1997 2,096,759 (10,884) 27 U.S. Treasury Bond 10 YR June 1997 2,907,563 (18,859) 58 U.S. Treasury Bond 30 YR June 1997 6,405,375 (46,341) 52 U.K. Gilt March 1997 4,873,653 74,918 67 U.K. Gilt June 1997 6,098,384 (32,614) ---------------- $ (96,870) ================ Sales 15 Euro Dollar September 1997 $ 3,525,000 $ 8,512 47 FRF MATIF Bond March 1997 6,007,354 (184,402) 64 FRF MATIF Bond June 1997 7,366,030 (4,881) 17 German Government Bond June 1997 2,577,311 3,391 4 Japanese Government Bond 10 YR June 1997 4,102,971 (4,952) 36 Spanish Government Bond 10 YR June 1997 2,940,951 53,298 21 Swiss Government Bond March 1997 1,954,317 (95,881) 4 Swiss Government Bond June 1997 326,808 (662) 40 U.S. Treasury Note 5 YR June 1997 4,230,625 25,028 ---------------- $ (200,549) ================
At February 28, 1997, the Fund has cash and/or securities to cover any margin requirements on open futures contracts. 19 GMO Global Bond Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Written option transactions
Puts Calls Principal Principal Amount Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums -------------- ---------------- ----------------- --------------- Outstanding, beginning of period - $ - - $ - Option written 4,000 199,000 804,000 192,986 Option exercised - - - - Option expired - - (800,000) (22,586) -------------- ---------------- ----------------- --------------- Outstanding, end of period 4,000 $ 199,000 4,000 $ 170,400 ============== ================ ================= =============== Summary of written options outstanding Principal Amount of Contracts (000's Exercise Expiration omitted) Price Date Value --------------------------- ------------------- ------------------ -------------- Japanese Yen Call 4,000 JPY 117 JPY 2/9/98 $ 198,400 Japanese Yen Put 4,000 JPY 117 JPY 2/9/98 132,000 -------------- $ 330,400 ==============
See Notes to the Schedule of Investments for definitions of currency abbreviations. 20 GMO Global Bond Fund (A Series of GMO Trust) Federal Income Tax Information on Distributions - (unaudited) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all the Fund's distributions are from investment company taxable income, except that the Fund has designated 4.43% of distributions as net capital gain dividends. 21 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. since 1993. Management Discussion and Analysis of Fund Performance - ------------------------------------------------------ The Class III share of the Global Bond Fund returned 12.0% for the fiscal year ended February 28, 1997, compared to 2.7% 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 past year was an exceptional period for the Fund. It outperformed its benchmark by 9.3% by following a variety of successful strategies. During the year bond market selection, currency selection and the decision to include emerging country debt added value above the benchmark return in each quarter. Although foreign interest rates generally declined during the year, the strength of the U.S. dollar meant that many foreign bond markets performed poorly. This was especially true in Japan, the second largest bond market in the world, where the bond market produced a total return (in U.S. dollars) of -5.1% for the twelve months ended February 28, 1997. The Fund significantly underweighted the Japanese market throughout the year and overweighted many of the high yielding bond markets. The bond markets in Italy, Spain and Sweden rose strongly on increased confidence in European Monetary Union (EMU). The Fund overweighted the U.K. pound, one of the few currencies to outperform the U.S. dollar. During the year the Fund held a position in emerging country sovereign debt, emphasizing undervalued issues. The strong bull market resulting from improved country fundamentals and renewed investor confidence produced index returns of more than 40% and helped the Fund exceed its benchmark's return. Outlook - ------- The Fund is structured to benefit from outperformance in the Australian, Canadian, Danish, U.K., Swedish and emerging bond markets. We expect underperformance from the French, Japanese, Spanish and Swiss bond markets. Our strategy maintains a market duration in each country. Strong relative performance is expected from the U.K. pound, Dutch guilder, Italian lira, Spanish peseta, Swiss franc and U.S. dollar. The Australian dollar, Belgian franc, Canadian dollar, French franc, Deutschemark and Swedish krona 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 28, 1997 Average Annual Total Return
Since Inception 1 Year 5 Year 12/28/95 Class III 11.6% n/a 10.6% 01/06/97 Class I n/a n/a -1.5%
[LINE GRAPH APPEARS HERE]
Date GMO Global Bond Fund J.P. Morgan Global Government Bond Index 12/28/95 9,985 10,000 02/29/96 9,875 9,971 02/28/97 11,061 10,243
Performance shown is net of all fees after reinbursement 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 return would have been lower had certain expenses not been waived during the periods shown, and does not include the effect of taxes on reinvested distributions. 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 paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Performance for Class I shares may be different due to a higher shareholder service fees. Class II shares have not commenced operations. Past performance is not indicative of future performance. Information is unaudited. GMO Foreign Fund (A Series of GMO Trust) Annual Report February 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the period from June 28, 1996 (commencement of operations) to February 28, 1997, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provides a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 17, 1997 GMO Foreign Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- STOCK AND EQUIVALENTS - 91.0% Australia - 4.2% 438,000 Australia and New Zealand Banking Group Ltd 2,733,404 599,044 Boral Ltd 1,627,423 650,000 Burns Philp & Co Ltd 1,009,060 365,000 Burswood Property Trust 407,971 161,500 Caltex Australia Ltd 545,300 94,738 Capral Aluminum Ltd 326,498 850,300 Crown Ltd * 1,551,667 209,000 Dominion Mining Ltd Warrants 12/31/98 * 64,890 438,000 Dominion Mining Ltd * 302,578 411,970 Email Ltd 1,301,468 381,469 Foodland Associated 1,835,797 1,167,029 Goodman Fielder Ltd 1,413,123 2,270,000 Menzies Gold NL * 1,021,945 1,912,349 MIM Holdings Ltd 2,657,014 435,210 National Mutual Holdings 645,217 309,000 Oil Search Ltd 635,591 49,400 Orogen Minerals Ltd GDR 144A * 1,228,578 1,727,335 Pasminco Ltd 3,217,818 462,001 Pioneer International Ltd 1,373,458 350,996 Rothmans Holdings Ltd 2,370,255 826,000 Sydney Harbour Casinos Preferred * 1,506,682 243,000 Westpac Banking Corp 1,376,901 275,206 Wills (WD & HO) Holdings Ltd 536,173 ------------------- 29,688,811 ------------------- Austria - 0.4% 37,625 Bank Austria AG (Participating Certificate) 1,108,369 3,763 Oesterreichische Brau Beteiligungs AG 231,205 1,346 Universale Bau AG 53,245 3,932 VA Technologie AG (Bearer) 593,083 2,575 Wienerberger Baustoffindustrie AG 467,484 ------------------- 2,453,386 ------------------- Belgium - 3.0% 874 Bekaert SA 535,176 20,827 Cie Francois De Enterprises 4,945,710 8,000 Credit Commercial Dexia 835,008 15,798 Electrabel SA 3,642,622 208 Formosa Fund IDR * 2,224,976 4,473 Generale Banque NPV 1,653,646 13,830 GIB Holdings Ltd 643,330 3,384 Kredietbank NPV 1,224,327 2,183 Petrofina SA Bruxelles 781,971 10,062 Powerfin SA 1,444,610 2,031 Solvay Et Cie 1,246,558 730 UCB Cap NPV 1,976,655 ------------------- 21,154,589 -------------------
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- Canada - 1.3% 52,481 Abitibi-Price Inc 865,789 210,528 Air Canada Inc * 1,062,728 30,693 Alliance Forest Preferred (Restricted) (d) * 662,407 10,000 Avenor Inc 172,288 66,649 Cambridge Shopping Centres Ltd 514,410 32,571 Canadian Occidental Petroleum Ltd 550,435 22,700 Canfor Corp 240,800 15,711 Elan Energy Inc * 126,433 81,900 Iamgold (International African Mining Gold) * 371,483 77,600 KAP Resources Ltd Warrants 8/3/00 (Restricted) (d) * 70,963 168,100 KAP Resources Ltd * 350,490 307,411 Markborough Property Inc * 132,689 200,000 Meridian Gold Inc Installment Receipt 144A (Restricted) (d) * 409,686 330,100 Semi-Tech Class A 664,112 29,300 St Laurent Paperboard * 466,219 66,200 Stone Consolidated Corp * 1,077,584 43,000 Suzy Shier (Non Voting) 248,519 99,000 Tembec Inc Class A * 764,101 20,860 Trizec Hahn Corp (Sub-Voting) 488,346 ------------------ 9,239,482 ------------------ Chile - 0.0% 91,751 Five Arrows Chile Investment Trust Ltd 283,969 17,821 Five Arrows Chile Warrants 5/31/99 8,335 ------------------ 292,304 ------------------ France - 7.3% 7,300 Accor SA 1,004,546 27,437 Alcatel Alsthom Cie Generale d'Electricite SA 2,817,237 4,788 Axa SA 318,763 4,788 Axa UAP * 17,144 22,864 Banque Nationale de Paris 1,037,394 10,960 Bertrand Faure SA 546,144 19,505 BIC SA 3,163,362 8,247 Bouygues 787,455 16,095 Casino Guichard-Perrachon 734,506 5,842 CGIP 1,666,272 3,068 Chargeurs International SA 155,088 4,822 Christian Dior 700,791 10,449 Club Mediterranee SA 802,387 37,973 Compagnie de Suez SA 1,855,560 4,990 Credit Local de France SA 498,361 12,345 Credit Lyonnais * 490,784
2 See accompanying notes to the financial statements. GMO Foreign Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- France - continued 5,929 Dollfus-Mieg and Cie 168,172 84,609 Elf Aquitaine SA 8,093,642 1,752 Elf Gabon 470,497 2,053 Eridania Beghin-Say SA 331,879 16,699 Financiere de Paribas SA 1,136,949 863 Gaz Et Eaux 381,718 10,311 Generale Des Eaux 1,435,175 7,758 Group Axime * 994,039 2,744 Groupe Andre * 231,183 9,188 Groupe Danone 1,393,367 1,035 Guyenne Et Gascogne 356,063 3,404 Labinal SA 773,731 3,321 Lafarge Coppee SA 208,098 23,179 Lagardere Groupe 683,494 18,091 Lyonnaise Des Eaux 1,848,062 15,837 Michelin SA Class B 991,810 5,379 Parisienne de Reescompte (CPR-Cie) 458,942 3,398 Pathe SA 851,692 12,222 Pechiney SA Class A 516,785 4,870 Pernod-Ricard 265,840 13,504 Peugeot SA 1,493,255 1,109 Pinault Printemps Redoute 469,310 42,287 Rhone Poulenc SA Class A 1,484,458 2,921 Saint-Gobain 430,667 45,072 Seita 1,724,623 13,703 Sidel (Bearer) 1,002,958 9,386 Societe Generale Paris 1,087,315 16,245 SPIE Batignolles 855,690 3,446 Strafor Facom 272,182 35,468 Thomson CSF 1,123,686 23,287 Total SA 1,857,712 2,000 TV Francaise 185,351 5,000 Vallourec 295,315 5,445 Worms et Compagnie SA 363,172 ------------------ 50,832,626 ------------------ Germany - 5.6% 89,000 Bankgesellschaft Berlin AG 1,702,820 37,500 BASF AG 1,382,760 30,990 Bayer AG 1,307,924 28,900 Bayerishe Hypotheken und Wechsel-Bank AG 854,229 10,000 Brau und Brunnen * 835,209
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- Germany - continued 111,000 Commerzbank AG 2,854,887 95,510 Continental AG 1,861,319 18,600 Daimler-Benz 1,349,111 184,500 Deutsche Telekom AG 3,551,860 116,900 Dresdner Bank 3,877,740 3,391 Dyckerhoff AG (Non Voting) 1,074,627 5,500 Holzmann (Philipp) * 1,664,791 2,600 Kolnische Rueckversicherungs Gesellschaft Preferred 1,694,112 7,595 Kolnische Rueckversicherungs Gesellschaft (Registered) 5,128,717 10,530 Metro AG Preferred Class I 667,403 94,500 Pfeiffer Vacuum Tech Sponsored ADR * 1,582,875 1,400 Rheinmetall Berlin AG 230,956 133 Rheinmetall Berlin AG Preferred (Non Voting) 5.60% 17,899 90,160 RWE Preferred 3,276,458 2,600 Thyssen AG 551,510 4,100 Villeroy and Boch AG 553,726 1,800 Volkswagen AG 872,172 2,900 Volkswagen AG Preferred .79% 1,104,549 3,900 Volkswagen AG Warrants 10/27/98 * 873,238 ------------------ 38,870,892 ------------------ Greece - 0.0% 25,760 Greek Progress Fund 247,168 ------------------ Hong Kong - 4.4% 1,015,400 Amoy Properties Ltd 1,212,868 749,277 Cathay Pacific Airways Ltd 1,165,908 74,400 Cheung Kong Holdings 708,549 1,130,081 Dairy Farm International 875,813 271,526 Great Eagle Holdings Ltd 1,018,573 1,229,800 Hang Lung Development Co Ltd 2,477,386 46,128 Hang Lung Development Co Ltd Warrants 10/31/97 * 8,220 1,885,499 Hong Kong Land Holdings 5,373,672 360,400 Hong Kong Telecommunications 618,972 589,900 Hysan Development Co Ltd 2,068,154 25,895 Hysan Development Warrants 4/30/98 * 16,719 209,000 Jardine International Motor Holdings Ltd 269,886 288,000 Jardine Strategic Preferred * 317,520 123,000 Jardine Strategic Warrants 5/02/98 * 41,820 624,000 Kumagai Gumi Hong Kong Ltd 713,120 286,000 Lai Sun Garment International Ltd 417,330 928,266 Liu Chong Hing Bank Ltd 1,762,075 1,033,000 National Mutual Asia Ltd 1,127,176 5,236,728 Regal Hotels International Ltd 1,555,330 1,551,288 Semi Tech (Global) Co Ltd 1,802,892
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- Hong Kong - continued 132,500 Swire Pacific Ltd Class A 1,137,816 979,000 Swire Pacific Ltd Class B 1,333,736 533,500 Wharf Holdings Ltd 2,369,886 527,000 Wheelock & Co Ltd 1,418,899 169,912 Wing On Co 196,373 683,486 Winsor Industrial Corp Ltd 166,812 356,743 Winsor Properties Holdings Ltd * 661,062 ------------------ 30,836,567 ------------------ Hungary - 0.0% 255,521 Fotex (Registered) * 200,871 ------------------ India - 0.2% 57,900 India Fund Class A * 243,717 21,000 India Liberalisation * 138,390 59,007 Mahindra & Mahindra GDR 144A 728,736 11,000 Morgan Stanley India Fund Inc * 121,000 ------------------ 1,231,843 ------------------ Indonesia - 0.1% 271,485 Bank Dagang Nasional Ind (Foreign Registered) 280,261 203,613 Bank Dagang Rights 3/24/97 * 101,913 274,000 Dharmal Sakit Sejatera (Foreign Registered) 322,857 190,637 Dharmala Intiland (Foreign Registered) 284,266 ------------------ 989,297 ------------------ Italy - 3.0% 22,682 Assicurazioni Generali SPA 412,034 331,317 Banca Commerciale Italiana SPA 670,476 30,000 Banca di Legano SPA 116,272 177,058 Banca Toscana 335,258 353,473 Banco Ambrosiano Veneto SPA (Non Convertible) 650,474 150,000 Comau Finanziaria SPA 457,101 875,424 Credito Italiano 1,196,585 76,062 Danieli and Co SPA (Non Convertible) 289,846 187,072 ENI SPA 923,737 18,852 Ericsson SPA 242,064 81,255 Falck Acciaierie and Ferriere Lombarde 360,359 232,045 Fiat SPA 716,731 282,668 Fiat SPA Preferred 475,016 21,031 Fiat SPA (Non Convertible) 35,591 194,000 Gilardini SPA 260,006 24,455 IFI Istituto Finanziario Preferred 2.46% 300,261 97,737 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 187,956 427,954 Industriali Riunite SPA * 284,627 42,393 Istituto Mobilaire Italiano 370,249 101,115 Italcementi Fabbriche Riunite Cemento SPA (Non Convertible) 245,907
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- Italy - continued 157,655 Italgas SPA 562,054 74,642 Mediaset SPA 314,689 385,124 Montedison SPA (Non Convertible) * 259,788 1,176,127 Montedison SPA * 849,038 185,947 Montefibre SPA 114,319 487,586 Olivetti and Co SPA * 178,878 421,888 Pirelli SPA 835,039 63,321 RAS SPA 571,013 42,600 Rinascente per l'Esercizio di Grandi Magazzini SPA 213,504 87,207 SAI di Risp 318,641 506,680 Seat SPA di Risp * 117,226 610,947 Seat SPA * 220,519 78,657 Sirti SPA 487,301 441,615 STET di Risp (Non Convertible) 1,544,346 581,157 STET SPA 2,493,129 1,111,885 Telecom Italia Mobile SPA (Non Convertible) 1,700,724 153,564 Telecom Italia SPA di Risp (Non Convertible) 308,945 31,053 Toro Assicurazioni 385,866 97,123 Unione Cementi Marchino Emiliane e di Augusta-Casale (Non Convertible) 255,163 36,561 Unione Cementi Marchino Emiliane e di Augusta-Casale 220,448 ------------------ 20,481,180 ------------------ Japan - 22.3% 23,000 Advantest Corp 1,299,693 44,000 Aisin Seiki Co Ltd 616,124 41,300 AJL Peps Trust Exchange 609,175 34,300 Akita Bank 187,856 63,000 Bank of Fukuoka Ltd 330,425 45,000 Banyu Pharmaceutical Co Ltd 656,227 268,000 Bridgestone Corp 4,796,421 32,000 Calsonic Corp 176,585 158,000 Canon Inc 3,299,031 67,124 Chubu Electric Power Co Inc 1,184,639 4,000 Chudenko Corp 114,343 33,258 Chugoku Electric Power Co Inc 575,932 21,500 Circle K Japan Co Ltd 1,095,575 25,000 Credit Saison Co 532,356 12,000 Daiichi Corp 219,737 45,000 Daiichi Seiyaku Co Ltd 734,526 88,000 Daikin Industries Ltd 689,767 124,000 Dainippon Printing Co Ltd 2,065,126 106,000 Daiwa House Industry Co Ltd 1,176,899 590 East Japan Railway Co 2,512,719 25,600 Exedy Corp 318,171
6 See accompanying notes to the financial statements. GMO Foreign Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- Japan - continued 30,000 Ezaki Glico Co Ltd 248,571 46 Fuji International Finance Preferred .25% 144A 1,026,224 158,000 Fuji Photo Film Co Ltd 5,288,922 40,000 Fujitec Co 367,885 302,000 Fujitsu Ltd 2,977,711 35,000 Gunma Bank Ltd 270,859 59,000 Hitachi Cable Ltd 398,906 39,000 Hitachi Credit Corp 571,961 633,000 Hitachi Ltd 5,454,636 37,412 Hokkaido Electric Power 638,568 181,000 Honda Motor Co Ltd 5,593,918 21,000 House Foods Corp 292,319 41,000 Hoya Corp 1,746,126 407,000 Ishikawajima Harima Heavy Industries 1,456,823 210,000 Isuzu Motors Ltd 948,297 129 Japan Tobacco Inc 865,772 80,000 Jusco Co 2,266,965 71,850 Kansai Electric Power 1,303,766 206,000 Kao Corp 2,253,045 173,000 Kawasaki Heavy Industry 716,712 18,000 Kirin Beverage 244,594 42,400 Kurita Water Industries Ltd 895,849 16,000 Kyudenko Corp 121,965 57,833 Kyushu Electric Power Co Inc 1,001,499 136,000 Marubeni Corp 531,875 78,000 Marui Co Ltd 1,118,071 37,000 Maruichi Steel Tube 579,418 453,000 Matsushita Electric Industrial Co Ltd 6,981,357 110,000 Matsushita Electric Works Ltd 966,112 267,000 Minebea Co Ltd 2,207,855 237,000 Minolta Co Ltd 1,462,963 467,000 Mitsubishi Heavy Industries 3,362,524 379,000 Mitsui & Co 2,807,407 23,000 Murata Manufacturing Co Ltd 806,115 21,500 Namco Ltd 607,465 179,000 NEC Corp 2,076,394 15,000 Nichicon Corp 172,757 28,350 Nichido Fire & Marine Insurance Co Ltd 157,852 58,700 Nippon Electric Glass Co 807,374 146,000 Nippon Express Co Ltd 939,945 104,000 Nippon Meat Packers Inc 1,042,671 125 Nippon Telegraph & Telephone 889,676 101,000 Nishimatsu Construction 753,169 149,000 Nissho Iwai Corp 561,728
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- Japan - continued 759,000 NKK Corp 1,628,809 181,000 Obayashi Corp 1,117,284 77,000 Okumura Corp 407,043 34,000 Omron Corp 535,256 64,000 Onward Kashiyama Co Ltd 784,821 26,700 Orix Corp 1,128,262 22,110 Paris Miki Inc 556,918 216,000 Ricoh Co Ltd 2,541,387 33,000 Rinnai Corp 596,073 55,000 Rohm Co Ltd 3,941,917 8 Sakura Finance Preferred .75% 144A 371,106 59,000 Sanden Corp 474,190 55,900 Sankyo Co Ltd 1,556,252 138,000 Sekisui Chemical Co Ltd 1,429,282 10,000 Shikoku Electric Power 173,171 21,000 Shimachu Co 487,199 123,750 Shin-Etsu Chemical Co Ltd 2,389,075 120,000 Shiseido Co Ltd 1,401,939 28,400 Sho Bond Construction Co 764,769 59,000 Showa Corp 462,946 21,500 SMC 1,462,549 42,900 Sony Corp 3,096,023 90,000 Sumitomo Electric 1,245,339 94,000 Sumitomo Trust & Banking Co Ltd 767,172 37,000 Tachi-S Co Ltd 334,162 46,000 Taisho Pharmaceutical Co Ltd 1,059,574 143,000 Taiyo Yuden Co Ltd 1,670,644 244,000 Takeda Chemical Industries Ltd 4,892,535 90,000 Tanabe Seiyaku Co Ltd 652,498 66,000 TDK Corp 4,418,593 116,000 Teijin Ltd 461,347 60,000 Terumo Corp 874,969 38,450 Toagosei Chemical Industry Co Ltd 135,719 61,000 Toda Corp 350,261 22,414 Tohoku Electric Power Co Inc 384,431 20,000 Tokyo Broadcasting System Inc 289,999 23,660 Tokyo Electric Power 439,128 53,000 Tokyo Electron 1,853,178 59,000 Toppan Printing Co Ltd 679,509 177,000 Toray Industries Inc 1,023,664 25,000 Tostem Corp 579,998 376,000 Toyota Motor Corp 9,626,647 25,500 Tsubaki Nakashima Co Ltd 204,947 62,000 UNY Co Ltd 1,094,208
8 See accompanying notes to the financial statements. GMO Foreign Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- Japan - continued 37,000 Wacoal Corp 374,016 301 West Japan Railway Co 982,633 8,500 Xebio Co 177,479 13,000 Yahagi Construction 65,706 81,000 Yamanouchi Pharmaceutical Co Ltd 1,691,275 70,000 Yamatake Honeywell 1,009,197 81,000 Yamato Kogyo Co 731,544 153,000 Yasuda Trust and Banking Co Ltd 415,809 45,000 Yokogawa Electric Corp 344,892 19,800 Yoshitomi Pharmaceutical Industries Ltd 134,855 ------------------ 155,248,147 ------------------ Korea - 1.1% 104,050 Bank of Pusan 793,301 390 Daehan Flour Mill 30,547 114,350 Daewoo Corp 787,161 22,000 Daewoo Securities Ltd Preferred 15.98% 124,718 829 Daewoo Securities 9,591 30,131 Hana Bank Sponsored GDR 391,703 51,300 Hanshin Securities Co Preferred 261,144 147,376 Hanwha Corp 1,875,555 159,000 Korea First Bank 643,836 59 Korea Trust * 194,700 16,000 Kyungki Bank 92,370 67,280 Kyungnam Bank 584,570 30,000 LG Securities Co Preferred * 145,774 100,000 Samsung Corp 1,136,114 23,036 Samsung Heavy Industries Co Ltd 205,215 72,000 Seoul Bank * 307,375 2,740 Shinhan Bank 40,774 1,040 Shinyoung Securities Preferred 6,437 6,300 Ssangyong Investment Securities Co Preferred 59.90% * 28,790 ------------------ 7,659,675 ------------------ Mexico - 0.2% 179,000 Cifra SA De Class C 274,003 15,000 Grupo Financiero Banamex Class B 35,119 2,348 Grupo Financiero Banamex Class L 4,949 55,562 Grupo Financiero Bancomer SA Class B 21,611 4,419 Grupo Financiero Bancomer SA Class L 1,397 1,496 Grupo Mexico Desarollo Class B ADR * 3,179 1,496 Grupo Mexico Desarollo Class L ADR * 4,114 26,000 Grupo Televisa 313,501 54,333 Mexico Fund 896,495 ------------------ 1,554,368 ------------------
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- Netherlands - 6.5% 34,760 ABN Amro Holdings NV 2,495,149 38,452 Aegon NV 2,549,561 6,551 Akzo Nobel NV 943,595 490,013 ASM International NV 6,676,427 12,329 De Boer Winkelbedrijven NV 941,492 12,527 Dordtsche Petroleum 2,302,466 2,849 DSM NV (Bearer) 285,080 82,040 Elsevier NV 1,313,470 25,000 Endemol Entertainment * 770,223 23,439 Fugro NV 496,233 24,668 Gist Brocades NV 835,345 54,225 Hal Trust Class B 851,014 53,774 Hal Trust (Participating Certificate) 843,936 29,649 Heidemij Holdings NV 293,554 18,513 Hunter Douglas 1,399,102 19,554 ING Groep NV 756,909 11,500 Internatio-Muller 347,641 36,154 Kon Bolswessanen 634,047 12,577 Kondor Wessels 513,333 11,822 Koninklijke Bam Groep NV 722,220 14,067 Koninklijke NV 321,523 9,298 Koninklijke Pakhoed 291,358 43,697 Koninklijke PTT Nederland 1,564,881 82 Moeara Enim Petroleum 1,727,407 16,545 Nedlloyd 486,208 9,554 Nutricia Ver Bedrijven 1,449,100 6,641 Oce Van Der Grinten NV 829,251 87,862 Philips Electronics 3,965,543 18,278 Philips NV ADR 822,510 13,917 Roto Smeets D Boer 641,320 12,367 Royal Dutch Petroleum (Bearer) 2,140,192 8,501 Unilever NV 1,619,792 12,462 Van Ommeren (Koninklijke) (Participating Certificate) 531,610 14,882 Vendex International 687,356 9,891 Volker Stevin 974,098 24,294 Wereldhave NV 1,568,593 ------------------ 45,591,539 ------------------ New Zealand - 2.3% 324 Air New Zealand Ltd Class B 845 1,092,000 Brierley Investment Ltd 1,050,069 766,651 Carter Holt Harvey Ltd 1,734,307 155,000 DB Group Ltd 107,229 247,096 Fisher and Paykel Industries Ltd 947,013 264,800 Fletcher Challenge Buildings 795,039
10 See accompanying notes to the financial statements. GMO Foreign Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- New Zealand - continued 264,836 Fletcher Challenge Energy 679,722 1,075,388 Fletcher Challenge Forestry 1,532,544 496,671 Fletcher Challenge Paper 979,251 279,000 Lion Nathan Ltd 687,123 1,430,285 Progressive Enterprise 1,464,417 2,057,000 Sovereign Assurance * 3,272,975 5,509,000 Trans Tasman Properties 2,820,233 281,051 Wrightson Ltd 208,041 ------------------ 16,278,808 ------------------ Norway - 1.1% 7,907 Bolig OG Naeringsk 191,262 121,700 Den Norske Bank AS Class A 541,804 19,100 Dyno Industrier AS 453,507 21,100 Elkem AS Class A 338,171 18,800 Fokus Bank 145,075 7,070 Hafslund ASA B Shares 46,688 11,050 Kvaerner Industrier AS 542,776 11,395 Leif Hoegh and Co AS 219,831 30,000 Norsk Data AS Class B ADR (a) * 300 27,800 Norsk Hydro AS 1,392,352 4,700 Norske Skogindustrier AS Class A 144,377 22,070 Nycomed ASA B Shares 327,516 12,400 Orkla-Borregaard AS Class A 988,158 8,300 Orkla-Borregaard AS Class B (Non Voting) 612,776 17,200 Saga Petroleum AS Class A 289,704 30,800 Schibsted AS 603,330 12,100 Storli ASA 238,818 62,300 Uni Storebrand AS * 416,961 20,000 Unitor AS 258,214 ------------------ 7,751,620 ------------------ Russia - 0.8% 10,000,000 Irkutskenergo * 2,700,000 63,978 Mosenergo AO Sponsored ADR 144A 2,655,087 ------------------ 5,355,087 ------------------ Singapore - 0.3% 168,400 Jardine Matheson Holdings Ltd 1,018,820 317,000 Jardine Strategic Holdings Ltd 1,039,760 ------------------ 2,058,580 ------------------ South Africa - 0.6% 61,000 Barlow Ltd 643,144 74,656 Malbak 144A 359,828 755,908 NSA International Inc * 2,875,874 151,244 NSA Investments Ltd Warrants 9/27/97 * 354,359 ------------------ 4,233,205 ------------------
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- Spain - 4.5% 3,530 Acerinox SA 490,777 9,600 Argentaria Corporacion Bancaria de Espana SA 384,402 72,627 Banco Bilbao Vizcaya SA 4,281,117 3,217 Banco Central Hispanoamericano SA 85,278 42,710 Banco De Santander (Registered) 2,890,038 8,960 Banco Popular (Registered) 1,628,239 9,992 Bankinter SA 1,334,822 16,000 Ebro Agricolas Compania de Alimentacion SA 280,153 44,137 Empresa Nacional de Electricidad SA 2,694,097 214,317 FENOSA SA 1,696,894 16,345 General Aguas de Barcelona SA 627,119 37,991 Hidroelec Cantabrico 1,295,961 348,299 Iberdrola SA 3,802,497 8,735 Inmobilana Metropolitana Vasco Central SA 293,706 41,944 Midesa 526,677 39,766 Repsol SA 1,511,857 73,147 Sevillana de Electricidad 663,349 283,733 Telefonica de Espana SA 6,531,698 25,628 Vallehermoso SA 536,338 ------------------ 31,555,019 ------------------ Switzerland - 3.1% 895 Ascom Holding AG (Bearer) 937,475 125 Baloise Holdings 245,763 1,586 Banque Cantonale Vaudoise (Bearer) 390,317 2,186 Belimo Automation AG 438,682 5,765 Biber Holdings AG * 1,173 320 Bobst SA (Bearer) 433,031 42,320 CS Holdings (Registered) 4,511,742 7,000 Feldschloesschen Huerlimann Warrants 12/15/98 * 9,966 3,500 Feldschloesschen Huerlimann (Participating Certificates) 267,542 305 Fischer (George) AG (Bearer) 311,203 1,819 Forbo Holdings AG (Registered) 736,233 993 Hero AG (Bearer) 457,790 702 Holderbank Financiere Glarus AG (Bearer) 522,574 3,274 Jelmoli (Registered) 346,267 675 Liechtenstein Global Trust AG 334,068 320 Lindt & Spruengli AG 485,966 2,048 Merkur Holding AG (Registered) 431,816 1,420 Nestle AG (Registered) 1,546,115 3,127 Novartis AG (Registered) 3,574,320 3,127 Novartis Rights 3/12/97 * 197,902 5,335 Oerlikon-Buhrle (Registered) 513,607 81 Roche Holdings (Participating Certificate) 681,773 1,945 SMH AG (Bearer) 1,107,661
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- Switzerland - continued 695 Sulzer AG (Participating Certificate) 414,644 1,962 Swiss Bank Corp (Registered) 372,447 141 Swiss Insurance Co 263,837 565 Union Bank of Switzerland (Bearer) 507,925 1,300 Winterthur Schweizerische Versicherunggesellschaft (Registered) 790,576 3,240 Zurich Vericher Namen (Registered) 964,312 ------------------ 21,796,727 ------------------ Taiwan - 0.1% 22,526 Baring Taiwan Fund Ltd * 264,681 15,700 R O C Taiwan Fund * 188,400 18,316 Tuntex Distinct Corp GDR 144A * 135,538 ------------------ 588,619 ------------------ United Kingdom - 18.6% 87,220 Allied Domecq Plc 619,714 417,287 Allied Irish Banks Plc 2,995,536 239,630 Amstrad Plc 746,727 257,076 Anglian Water Plc 2,717,838 1,832,931 ASDA Group 3,349,278 363,950 BAA 3,147,057 367,867 Bank of Scotland 2,049,598 79,112 Barclays Bank Plc 1,430,109 300,000 BAT Industries 2,628,347 476,651 Berkley Group 5,739,102 415,127 BG Plc 1,154,762 305,153 BPB Industries Plc 1,702,671 481,791 British Airways 4,955,995 694,753 British Petroleum 7,702,061 100,000 British Sky Broadcasting Plc 977,269 521,650 British Steel 1,276,608 1,535,530 British Telecom Plc 10,661,954 572,000 BTR 2,244,389 589,437 Capital Shopping Centres 3,760,116 100,000 Caradon 445,400 415,127 Centrica Plc * 443,618 149,003 Commercial Union Plc 1,657,931 302,817 Costain Group (b) 222,321 110,292 Energy Group Plc * 939,294 121,300 First Russian Frontiers Trust Plc * 2,503,447 25,400 First Russian Frontiers Warrants 2001 * 279,721 63,027 Flextech Plc * 789,723 69,713 General Accident 950,839 350,000 General Electric 2,129,923 327,167 Glaxo Wellcome Plc 5,545,901 384,467 Grand Metropolitan 2,854,023
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 28, 1997
Shares Description Value ($) - -------------------------------------------------------------------------------------------------------------- United Kingdom - continued 22,454 Great Portland Estates 76,931 140,340 Great Portland Estates Plc 483,116 202,079 Great Universal Stores Plc 2,146,294 157,100 Guardian Royal 712,538 83,636 Hanson Plc Warrants 9/30/97 1,307 137,865 Hanson Plc 618,549 647,867 Hillsdown Holdings 2,018,860 68,742 HSBC Holdings 1,772,011 73,918 Hyder Plc 1,000,957 148,539 Hyder Plc Cumulative Redemption Preferred Shares 261,123 240,271 ICI 2,967,456 110,292 Imperial Tobacco Group Plc * 764,751 381,292 Ladbroke Group 1,430,779 2,121 Lloyds TSB Group 17,648 698,561 Marley 1,413,231 343,140 Mirror Group Plc 1,172,850 193,700 National Power 1,552,456 182,000 National Westminster Bank 2,252,237 176,246 Peninsular & Oriental Steam Navigation Co 1,917,927 71,700 Powergen 722,927 2,148,935 Raglan Property Plc 841,437 297,600 Railtrack Group Plc 2,197,043 569,847 Royal & Sun Alliance Insurance 4,574,150 223,562 Safeway Plc 1,320,364 500,000 Scottish Power Plc 2,855,125 1,005,847 Sears 1,329,242 203,554 Severn Trent Plc 2,367,861 100,000 Smith (WH) Group 742,333 211,470 Standard Chartered 2,908,462 438,000 Sun Life & Province Holding 2,058,039 694,766 T & N 1,847,622 100,000 Tarmac 164,782 200,000 Tate & Lyle 1,424,300 200,225 Taylor Woodrow Plc 623,934 188,228 TC Group Plc 359,300 166,250 Thames Water 1,863,397 ------------------ 129,402,611 ------------------ TOTAL STOCK AND EQUIVALENTS (Cost $593,446,085) 635,593,021 ------------------ Par Value CONVERTIBLE BONDS - 0.2% Hong Kong - 0.1% HKD 702,000 Sino Land Co, 5.00% due 2/26/01 144A 737,100 ------------------ Italy - 0.0% ITL280,300,000 Mediobanca (Banc Credito Finanz), 4.00% due 12/31/97 162,707 ------------------
14 See accompanying notes to the financial statements. GMO Foreign Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997
Par Value ($) Description Value ($) - -------------------------------------------------------------------------------------------------------------- Mexico - 0.0% $ 630,000 Grupo Financiero Invermexico, 7.50% due 6/16/01 233,100 ------------------ New Zealand - 0.1% NZD 753,000 Brierley Investment, 9.00% due 6/30/98 671,994 ------------------ TOTAL CONVERTIBLE BONDS (Cost $1,741,392) 1,804,901 ------------------ SHORT-TERM INVESTMENTS - 15.5% Cash Equivalents - 15.5% $ 30,000,000 First National Bank of Chicago Time Deposit, 5.44% due 3/3/97 30,000,000 $ 27,300,000 Republic Bank of New York Time Deposit, 5.34% due 3/3/97 27,300,000 51,008,420 The Boston Global Investment Trust (c) 51,008,420 ------------------ TOTAL SHORT-TERM INVESTMENTS (Cost $108,308,420) 108,308,420 ------------------ TOTAL INVESTMENTS - 106.7% (Cost $703,495,897) * * 745,706,342 Other Assets and Liabilities (net) - (6.7%) (47,029,617) ------------------ TOTAL NET ASSETS - 100.0% $ 698,676,725 ================== Notes to the Schedule of Investments: ADR American Depository Receipt GDR Global Depository Receipt HKD Hong Kong Dollar ITL Italian Lira NZD New Zealand Dollar (a) Bankrupt security. (b) Valued by management (Note 1). (c) Represents investment of security lending collateral (Note 1). (d) Security is restricted as to resale. The aggregate market value of restricted securities is $1,143,056 or .16% of total assets. 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. A dividend has not been declared for the year ended February 28, 1997. ** The aggregate identified cost for federal income tax purposes is $706,578,106, resulting in gross unrealized appreciation and depreciation of $69,760,211 and $30,631,975, respectively, and net unrealized appreciation of $39,128,236.
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 28, 1997 - --------------------------------------------------------------------------------
At February 28, 1997, industry sector diversification of the Fund's equity investments was as follows: Industry Sector (Unaudited) Banking 10.9% Consumer Goods 8.0 Electronic Equipment 6.2 Construction 5.9 Oil and Gas 5.6 Machinery 5.5 Conglomerates 5.2 Retail Trade 5.1 Utilities 5.0 Insurance 4.7 Telecommunications 4.7 Services 4.4 Health Care 3.6 Chemicals 3.6 Automotive 3.6 Transportation 2.6 Real Estate 2.5 Metals and Mining 2.3 Computers 1.8 Paper and Allied Products 1.6 Food and Beverage 1.4 Communications 1.0 Financial Services 0.8 Textiles 0.5 Aerospace 0.3 Miscellaneous 3.2 -------- 100.0% ========
16 See accompanying notes to the financial statements. GMO Foreign Fund (A Series of GMO Trust) Statement of Assets and Liabilities - February 28, 1997 - --------------------------------------------------------------------------------
Assets: Investments, at value (cost $703,495,897) (Note 1) $ 745,706,342 Foreign currency, at value (cost $6,498,934) (Note 1) 6,555,992 Cash 28,266 Receivable for investments sold 1,855,676 Dividends and interest receivable 552,544 Foreign withholding taxes receivable 172,112 Receivable for expenses waived or borne by Manager (Note 2) 125,632 ----------------- Total assets 754,996,564 ----------------- Liabilities: Payable upon return of securities loaned (Note 1) 51,008,420 Payable for investments purchased 4,552,487 Payable to affiliate for (Note 2): Management fee 390,054 Shareholder service fee 79,561 Accrued expenses 289,317 ----------------- Total liabilities 56,319,839 ----------------- Net assets $ 698,676,725 ================= Net assets consist of: Paid-in capital $ 659,398,781 Distributions in excess of net investment income (76,274) Accumulated net realized loss (2,863,625) Net unrealized appreciation 42,217,843 ----------------- $ 698,676,725 ================= Net assets attributable to: Class I Shares $ 4,890,763 ================= Class II Shares $ 21,956,554 ================= Class III Shares $ 671,829,408 ================= Shares outstanding: Class I 459,112 ================= Class II 2,061,100 ================= Class III 63,052,464 ================= Net asset value per share: Class I $ 10.65 ================= Class II $ 10.65 ================= Class III $ 10.66 =================
See accompanying notes to the financial statements. 17 GMO Foreign Fund (A Series of GMO Trust) Statement of Operations - Period from June 28, 1996 (commencement of operations) to February 28, 1997 - -------------------------------------------------------------------------------- Investment income: Dividends (net of foreign tax expense of $768,535) $ 6,259,532 Interest (including security lending income of $91,837) 1,830,178 ------------- Total income 8,089,710 ------------- Expenses: Management fee (Note 2) 3,034,381 Custodian fees 393,371 Registration fees 140,767 Audit fees 65,234 Stamp duties and transfer taxes 49,325 Transfer agent fees 29,086 Legal fees 26,846 Trustees fee (Note 2) 2,162 Miscellaneous 3,629 Fees waived or borne by Manager (Note 2) (1,267,971) ------------- 2,476,830 Shareholder service fee (Note 2) Class I 7,690 Class II 11,884 Class III 594,714 ------------- Net expenses 3,091,118 ------------- Net investment income 4,998,592 ------------- Realized and unrealized gain (loss): Net realized gain (loss) on: Investments (2,845,646) Foreign currency, forward contracts and foreign currency related transactions (533,774) ------------- Net realized loss (3,379,420) ------------- Change in net unrealized appreciation (depreciation) on: Investments 42,210,445 Foreign currency, forward contracts and foreign currency related transactions 7,398 ------------- Net unrealized gain 42,217,843 ------------- Net realized and unrealized gain 38,838,423 ------------- Net increase in net assets resulting from operations $ 43,837,015 =============
18 See accompanying notes to the financial statements. GMO Foreign Fund (A Series of GMO Trust) Statement of Changes in Net Assets - Period from June 28, 1996 (commencement of operations) to February 28, 1997 - --------------------------------------------------------------------------------
Increase (decrease) in net assets: Operations: Net investment income $ 4,998,592 Net realized loss (3,379,420) Change in net unrealized appreciation (depreciation) 42,217,843 --------------------- Net increase in net assets resulting from operations 43,837,015 --------------------- Distributions to shareholders from: Net investment income Class I (32,692) Class II (86,399) Class III (4,439,981) --------------------- Total distributions from net investment income (4,559,072) --------------------- Net share transactions: (Note 5) Class I 4,554,323 Class II 21,186,399 Class III 633,658,060 --------------------- Increase in net assets resulting from net share transactions 659,398,782 --------------------- Total increase in net assets 698,676,725 Net assets: Beginning of period - --------------------- End of period (including distributions in excess of net investment income of $76,274) $ 698,676,725 =====================
See accompanying notes to the financial statements. 19 GMO Foreign Fund (A Series of GMO Trust) Financial Highlights (For a Class I share outstanding throughout the period) - --------------------------------------------------------------------------------
Period from July 10, 1996 (commencement of operations) to February 28, 1997 -------------------- Net asset value, beginning of period $ 9.88 -------------------- Income from investment operations: Net investment income 0.06 Net realized and unrealized gain 0.78 -------------------- Total from investment operations 0.84 -------------------- Less distributions to shareholders from: Net investment income (0.07) -------------------- Net asset value, end of period $ 10.65 ==================== Total Return (a) 8.53% Ratios/Supplemental Data: Net assets, end of period (000's) $ 4,891 Net expenses to average daily net assets 0.89%* (b) Net investment income to average daily net assets 0.98%* Portfolio turnover rate 13% Average broker commission rate per equity share (c) $ 0.0204 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.02
* Annualized. (a) The total return would have been lower had certain expenses not been waived during the period shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .01% of average daily net assets. (c) The average broker commission rate will vary depending on the markets in which trades are executed. 20 See accompanying notes to the financial statements. GMO Foreign Fund (A Series of GMO Trust) Financial Highlights (For a Class II share outstanding throughout the period) - --------------------------------------------------------------------------------
Period from September 30, 1996 (commencement of operations) to February 28, 1997 --------------------- Net asset value, beginning of period $ 10.02 --------------------- Income from investment operations: Net investment income 0.06 Net realized and unrealized gain 0.65 --------------------- Total from investment operations 0.71 --------------------- Less distributions to shareholders from: Net investment income (0.08) --------------------- Net asset value, end of period $ 10.65 ===================== Total Return (a) 7.08% Ratios/Supplemental Data: Net assets, end of period (000's) $ 21,957 Net expenses to average daily net assets 0.84%* (b) Net investment income to average daily net assets 0.83%* Portfolio turnover rate 13% Average broker commission rate per equity share (c) $ 0.0204 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.02
* Annualized. (a) The total return would have been lower had certain expenses not been waived during the period shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .02% of average daily net assets. (c) The average broker commission rate will vary depending on the markets in which trades are executed. See accompanying notes to the financial statements. 21 GMO Foreign Fund (A Series of GMO Trust) Financial Highlights (For a Class III share outstanding throughout the period) - --------------------------------------------------------------------------------
Period from June 28, 1996 (commencement of operations) to February 28, 1997 --------------------- Net asset value, beginning of period $ 10.00 --------------------- Income from investment operations: Net investment income 0.08 Net realized and unrealized gain 0.66 --------------------- Total from investment operations 0.74 --------------------- Less distributions to shareholders from: Net investment income (0.08) --------------------- Net asset value, end of period $ 10.66 ===================== Total Return (a) 7.37% Ratios/Supplemental Data: Net assets, end of period (000's) $ 671,829 Net expenses to average daily net assets 0.76%* (b) Net investment income to average daily net assets 1.24%* Portfolio turnover rate 13% Average broker commission rate per equity share (c) $ 0.0204 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.02
* Annualized. (a) The total return would have been lower had certain expenses not been waived during the period shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .01% of average daily net assets. (c) The average broker commission rate will vary depending on the markets in which trades are executed. 22 See accompanying notes to the financial statements. GMO Foreign Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1997 - -------------------------------------------------------------------------------- 1. Significant accounting policies The 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 commenced operations on June 28, 1996 subsequent to a transaction involving the reorganization of the GMO International Equities Pool of The Common Fund for Nonprofit Organizations (the "GMO Pool"). The GMO Pool was discontinued and its net assets distributed pro rata to the unitholders of the GMO Pool as a liquidating distribution. Such net assets were immediately thereafter transferred by the unitholders to the Fund in exchange for shares of the Fund. The portfolio of the Fund on June 28, 1996 was the same as the portfolio of the GMO Pool prior to the transfer. The Fund seeks maximum total return through investment primarily in equity securities of non-U.S. issuers. The Fund offers three classes of shares: Class I, Class II, and Class III. 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 generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. 23 GMO Foreign Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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. 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. Certain investments in 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. 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 net exchange gains and losses on disposition of foreign currencies, 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 open 24 GMO Foreign Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- forward currency contracts as of February 28, 1997. 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 28, 1997, the Fund loaned securities having a market value of $41,167,234 collateralized by cash in the amount of $51,008,420, 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to the differing treatments for foreign currency and passive foreign investment company transactions. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments. 25 GMO Foreign Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ------------------------ --------------------------- ------------------ ($515,794) $515,795 ($1) 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 in such manner as deemed equitable by the Trustees, 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 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 and the possible imposition of currency exchange blockages 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. 2. Fees and other transactions with affiliates GMO earns a management fee paid monthly at the annual rate of .75% of average daily net assets. The Fund has adopted a Shareholder Services 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 .28% for Class I shares, .22% for Class II shares, and .15% for Class III shares. 26 GMO Foreign Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .60% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the period ended February 28, 1997, was $2,162. 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 and in-kind transactions, for the period ended February 28, 1997 aggregated $157,513,987 and $73,997,402, respectively. 4. Principal shareholders At February 28, 1997, 100% of the outstanding Class I shares of the Fund were held by two shareholders, 100% of the outstanding Class II shares of the Fund were held by one shareholder and 30% of the outstanding Class III shares were held by two shareholders, each holding in excess of 10% of the outstanding shares of the respective class. 27 GMO Foreign Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 10, 1996 (commencement of operations) to February 28, 1997 Class I: ------------------------------------------- Shares Amount --------------- --------------- Shares sold 455,993 $ 4,521,631 Shares issued to shareholders in reinvestment of distributions 3,119 32,692 Shares repurchased - - --------------- --------------- Net increase 459,112 $ 4,554,323 =============== =============== Period from September 30, 1996 (commencement of operations) Class II: to February 28, 1997 ------------------------------------------- Shares Amount --------------- --------------- Shares sold 2,052,856 $ 21,100,000 Shares issued to shareholders in reinvestment of distributions 8,244 86,399 Shares repurchased - - --------------- --------------- Net increase 2,061,100 $ 21,186,399 =============== =============== Period from June 28, 1996 (commencement of operations) Class III: to February 28, 1997 ------------------------------------------- Shares Amount --------------- --------------- Shares sold 64,118,750 $ 644,703,588 Shares issued to shareholders in reinvestment of distributions 167,499 1,757,065 Shares repurchased (1,233,785) (12,802,593) --------------- --------------- Net increase 63,052,464 $ 633,658,060 =============== ===============
28 GMO Foreign Fund (A Series of GMO Trust) Federal Income Tax Information on Distributions - (Unaudited) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all the Fund's distributions are from investment company taxable income. At February 28, 1997, the Fund had a capital loss carryforward available to offset future capital gains, if any, of the following amount: Year of Expiration Amount ------------------ ------ 2005 $ 649,423 The Fund has also elected to defer to March 1, 1997 post-October losses of $2,104,551. 29 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. Jui and Ms. Spruill have been portfolio managers with GMO for nine and seven years, respectively. The GMO Foreign Fund is managed on a geographic basis by Ms. Spruill, Mr. Lai, Mr. Hoyt Ludington, Mr. Richard Mattione and Mr. Joshua Rosenthal, Ms. Margaret McGetrick is currently on a leave of absence. Management Discussion and Analysis of Fund Performance - ------------------------------------------------------ For the fiscal year ended February 28, 1997, the Class III shares of the GMO Foreign Fund returned 11.8%, outperforming its EAFE benchmark by 8.6% after fees. This outperformance resulted from good country and stock selection combined with a small boost from hedging. Nearly all global equity markets posted positive returns over the past twelve months. However, while the S&P 500 returned 26.2%, the Morgan Stanley Capital International Europe Australasia and Far East (EAFE) Index returned only 3.2%. EAFE's lower return was the result of two major influences -- the strong dollar and a weak Japanese stock market. Stripping out the effect of the strong dollar and a weak Japan, the EAFE ex-Japan index returned 25.6% in local terms over this period nearly matching the return of the S&P. Eleven out of the twenty EAFE markets outperformed the S&P 500 in local terms. However, once adjusted into U.S. dollars, only seven countries posted a greater return than the S&P. The dollar strengthened 9.2% against an EAFE-weighted basket of currencies, thus significantly impacting returns for U.S. investors. The other major influence on EAFE's return was the decline in the Japanese stock market. Japan returned -20.5% over the past fiscal year -- far and away the worst performance of any developed market. This decline severely impacted EAFE's return as Japan comprised over 39% of the EAFE index as of February 29, 1996. Our country selection benefited as we were underweight in Japan throughout the year. We are currently at a weight of 22% in Japan. This is 8% underweight relative to the benchmark. Our view on Japan is less negative than it has been in the past due to the long-term underperformace of the market and the currency as well as its recent attractiveness on parameters such as price-to-book. We are most overweight in Spain, New Zealand, the Netherlands, and Belgium. Currency Hedging Currency hedging added 50 basis points to our total return over the past fiscal year. We began the year 5.5% hedged primarily against the D-Mark and Swiss franc. During the year we unwound our hedges until we were completely unhedged as of mid December. Our policy is to hedge up to 30% of the portfolio in order to protect the underlying dollar-based assets of our clients. However, we will not speculate on short-term movements in currencies. We will only hedge when we believe the dollar to be considerably under or overvalued relative to foreign currencies. We are currently unhedged as we do not believe the dollar to be undervalued enough on a long-term basis to merit hedging. Emerging Markets Emerging markets have grown considerably in the past three years in terms of capitalization, the number of investable markets, and the number of stocks listed. We have hired an additional portfolio manager, Josh Rosenthal, to increase our focus on these markets in response to their growing size, complexity, and importance. Past investments have been 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. Currently 3.9% of the GMO Foreign Fund is invested in emerging markets, with Russia and Korea comprising the majority of the emerging exposure. 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. Like the U.S., the valuations of many foreign markets are beginning to appear a bit stretched after having posted another strong year. However, we believe that investment opportunities still exist abroad given the variety of stocks available in foreign markets and the relative inefficiency of these markets compared to the U.S. stock 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 Foreign Fund Class III Shares and the MSCI EAFE Index As of February 28, 1997 Average Annual Total Return
Since 1 Year 5 Year 10 Year Inception Class 8/31/84 III 11.8% 17.9% 11.5% 19.0% Class 9/30/96 II n/a n/a n/a 7.1% Class 7/10/96 I n/a n/a n/a 8.5%
[LINE GRAPH APPEARS HERE]
Date GMO Foreign Fund MSCI EAFE Index 08/31/84 10,000 10,000 02/28/85 10,870 10,574 02/28/86 20,472 18,498 02/28/87 29,752 31,363 02/29/88 30,894 37,249 02/28/89 38,201 45,012 02/28/90 45,598 43,565 02/28/91 47,667 42,561 02/29/92 48,911 39,400 02/28/93 47,199 37,774 02/28/94 68,182 52,575 02/28/95 66,181 50,235 02/29/96 78,948 58,702 06/28/96 78,948 58,702 02/28/97 88,293 60,604
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 waived during the periods shown and do not include the effect of taxes on reinvested distributions. 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. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Performance for Class I shares and Class II shares may be different due to higher shareholder service fees. Past performance is not indicative of future performance. Information is unaudited. GMO Global Properties Fund (A Series of GMO Trust) Annual Report February 28, 1997 Report of Independent Accountants To the Trustees of GMO Trust and the Shareholders of GMO Global Properties 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 Properties Fund at February 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the period from December 20, 1996 (commencement of operations) to February 28, 1997, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian provides a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 22, 1997 GMO Global Properties Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 28, 1997
Shares Description Value ($) - ----------------------------------------------------------------------------------------------------------------------- REAL ESTATE INVESTMENT TRUSTS - 35.2% Canada - 0.5% 2,000 Trizec Hahn Corp 46,750 ---------------------------- Netherlands - 9.5% 9,500 German City Estates NV (Bearer) 146,593 2,500 Nagron 266,221 5,700 Vastned (Offices) NV 228,442 5,550 VIB NV 157,837 1,600 Wereldhave NV 103,307 ---------------------------- 902,400 ---------------------------- New Zealand - 9.6% 500,000 Trans Tasman Properties 255,966 1,136,363 Trans Tasman Properties Ltd (Convertible) 652,493 ---------------------------- 908,459 ---------------------------- United States - 15.6% 4,000 Arden Realty Group Inc 110,500 2,500 Avalon Properties 69,688 2,500 Bedford Properties Investments Inc 46,875 2,000 Developers Diversified Realty Co 73,250 3,000 Eastgroup Properties SBI 85,500 4,000 Felcor Suite Hotels Inc 135,500 2,000 Glimcher Realty Trust 41,750 1,000 HRE Properties 16,375 2,000 Lexington Corporate Properties 25,750 2,500 MGI Properties 54,375 2,000 Mills Corp 47,000 4,000 Patriot American Hospitality 181,000 3,000 Prentiss Properties Trust 81,000 3,000 Reckson Associates Realty Corp 137,250 2,500 Security Capital Atlantic Inc 58,750 2,500 Security Capital Pacific Trust 58,750 4,000 Shurgard Storage Centers Class A 112,000 2,000 Simon DeBartolo Group Inc 60,250 2,500 Urban Shopping Centers Inc 78,438 ---------------------------- 1,474,001 ---------------------------- TOTAL REAL ESTATE INVESTMENT TRUSTS (Cost $3,375,695) 3,331,610 ---------------------------- Par Value SHORT-TERM INVESTMENTS - 64.5% Cash Equivalents - 64.5% $ 6,100,000 First National Bank of Chicago Time Deposit, 5.44% due 3/3/97 6,100,000 ---------------------------- TOTAL SHORT-TERM INVESTMENTS (Cost $6,100,000) 6,100,000 ---------------------------- TOTAL INVESTMENTS - 99.7% (Cost $9,475,695) * * 9,431,610 Other Assets and Liabilities (net) - 0.3% 32,745 ---------------------------- TOTAL NET ASSETS - 100.0% $ 9,464,355 ============================
See accompanying notes to the financial statements. 1 GMO Global Properties Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1997 - -------------------------------------------------------------------------------- Note to the Schedule of Investments: ** The aggregate identified cost for federal income tax purposes is $9,475,695, resulting in gross unrealized appreciation and depreciation of $66,289 and $110,374 respectively, and net unrealized depreciation of $44,085. 2 See accompanying notes to the financial statements. GMO Global Properties Fund (A Series of GMO Trust) Statement of Assets and Liabilities - February 28, 1997 - -------------------------------------------------------------------------------- Assets: Investments, at value (cost $9,475,695) (Note 1) $ 9,431,610 Cash 95,095 Dividends and interest receivable 2,961 -------------- Total assets 9,529,666 -------------- Liabilities: Payable to affiliate for (Note 2): Management fee 5,449 Shareholder service fee 1,090 Accrued expenses 58,772 -------------- Total liabilities 65,311 -------------- Net assets $ 9,464,355 ============== Net assets consist of: Paid-in capital $ 9,468,089 Accumulated undistributed net investment income 40,351 Net unrealized depreciation (44,085) -------------- $ 9,464,355 ============== Net assets attributable to Class III Shares $ 9,464,355 ============== Shares outstanding - Class III 940,343 ============== Net asset value per share - Class III $ 10.06 ==============
See accompanying notes to the financial statements. 3 GMO Global Properties Fund (A Series of GMO Trust) Statement of Operations - Period from December 20, 1996 (commencement of operations) to February 28, 1997 - -------------------------------------------------------------------------------- Investment income: Dividends $ 2,040 Interest 75,199 ------------ Total income 77,239 ------------ Expenses: Management fee (Note 2) 13,266 Audit fees 28,372 Custodian fees 21,705 Registration fees 4,990 Transfer agent fees 4,970 Legal fees 2,915 Trustees fee (Note 2) 50 Miscellaneous 1,495 Fees waived or borne by Manager (Note 2) (45,480) ------------ 32,283 Shareholder service fee - Class III (Note 2) 2,653 ------------ Net expenses 34,936 ------------ Net investment income 42,303 ------------ Realized and unrealized gain (loss): Net realized loss on foreign currency and foreign currency related transactions (1,952) Change in net unrealized appreciation (depreciation) on investments (44,085) ------------ Net realized and unrealized loss (46,037) ------------ Net decrease in net assets resulting from operations $ (3,734) ============
4 See accompanying notes to the financial statements. GMO Global Properties Fund (A Series of GMO Trust) Statement of Changes in Net Assets - Period from December 20, 1996 (commencement of operations) to February 28, 1997 - -------------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income $ 42,303 Net realized loss (1,952) Change in net unrealized appreciation (depreciation) (44,085) ------------ Net decrease in net assets resulting from operations (3,734) ------------ Net share transactions - Class III (Note 5) 9,468,089 ------------ Total increase in net assets 9,464,355 Net assets: Beginning of period - ------------ End of period (including accumulated undistributed net investment income of $40,351) $ 9,464,355 ============
See accompanying notes to the financial statements. 5 GMO Global Properties Fund (A Series of GMO Trust) Financial Highlights (For a Class III share outstanding throughout the period) - --------------------------------------------------------------------------------
Period from December 20, 1996 (commencement of operations) to February 28, 1997 -------------------- Net asset value, beginning of period $ 10.00 -------------------- Income from investment operations: Net investment income 0.04 Net realized and unrealized gain on investments 0.02(c) -------------------- Total from investment operations 0.06 -------------------- Net asset value, end of period $ 10.06 ==================== Total Return (a) 0.60% Ratios/Supplemental Data: Net assets, end of period (000's) $ 9,464 Net expenses to average daily net assets 1.98%* Net investment income to average daily net assets 2.39%* Portfolio turnover rate 0% Average broker commission rate (b) $ 0.0062 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.05
* Annualized. (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) The average broker commission rate will vary depending on the markets in which trades are executed. (c) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments for the period ended February 28, 1997 due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund. 6 See accompanying notes to the financial statements. GMO Global Properties Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1997 - -------------------------------------------------------------------------------- 1. Significant accounting policies The GMO Global Properties Fund (the "Fund"), which commenced operations on December 20, 1996, 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. Prior to April 7, 1997, the offering of shares for the Fund was not registered under the Securities Act of 1933, as amended (the "Act"), but rather was made privately by the Fund pursuant to the private placement exemption from registration provided by Section 4(2) of the Act and Regulation D thereunder. The Fund seeks long-term capital growth primarily through investment in securities of issuers throughout the world which are engaged in or related to the real estate industry or which own significant real estate assets. The Fund offers three classes of shares: Class I, Class II, and Class III. 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. At February 28, 1997, Class III was the only active class of shares of the Fund. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 7 GMO Global Properties Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 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 net exchange gains and losses on disposition of foreign currencies, 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. 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to the differing treatments for foreign currency transactions. 8 GMO Global Properties Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ----------------------------- ------------------------- --------------- ($1,952) $1,952 -
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 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. Dividends representing a return of capital are reflected as a reduction of cost. 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 in such manner as deemed equitable by the Trustees, 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 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. 9 GMO Global Properties Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- Purchases and redemptions of Fund shares The premium on cash purchases of Fund shares is .60% of the amount invested. In the case of cash redemptions, the fee is .30% of the amount redeemed. The Manager may waive such premiums to the extent that a transaction results in minimal brokerage and transaction costs to the Fund. All purchase premiums and redemption fees are paid to and recorded as paid-in capital by the Fund. For the period ended February 28, 1997, the Fund received $56,808 in purchase premiums and no redemption fees. There is no premium for reinvested distributions. Investment risks There are certain additional risks involved in investing in real-estate related securities 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 values 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. Additionally, 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 and the possible imposition of currency exchange blockages 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. 2. Fees and other transactions with affiliates GMO earns a management fee paid monthly at the annual rate of .75% of average daily net assets. The Fund has adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares, and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .60% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the period ended February 28, 1997, was $50. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 10 GMO Global Properties Fund (A Series of GMO Trust) Notes to Financial Statements - continued - -------------------------------------------------------------------------------- 3. Purchases and sales of securities Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended February 28, 1997, aggregated $3,375,695 and $0, respectively. 4. Principal shareholders At February 28, 1997, 73% of the outstanding shares of the Fund were held by one shareholder. 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 20, 1996 (commencement of operations) to February 28, 1997 ------------------------------------------ Class III: Shares Amount ------------- ------------- Shares sold 940,343 $ 9,468,089 Shares issued to shareholders in reinvestment of distributions 0 0 Shares repurchased 0 0 ------------- ------------- Net increase 940,343 $ 9,468,089 ============= =============
11 GMO Global Properties Fund (A Series of GMO Trust) Portfolio Managers - ------------------ Mr Eyk Van Otterloo and Mr Wilson Magee are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Van Otterloo has been with GMO since its founding in 1977. Mr. Magee joined GMO in 1997 following 15 years of experience in the real estate industry. Management Discussion and Analysis of Fund Performance - ------------------------------------------------------ The Class III shares of the Global Properties Fund (GPF) were launched December 20, 1996, to provide global diversification within the real estate asset class. The total return for the Fund since inception was 0.6%. (For the period beginning January 1, 1997, and ending February 28, 1997, GPF returned -0.1%, outperforming its benchmark, the GPR LIFE Global Property Index, which returned - -1.1%, but underperforming the MSCI World Equity Index 2.3%)/1/. Fiscal year performance reflects only two months of performance for the Fund during which the Fund was not fully invested in property stocks. Most singificant in terms of value-added was the absence of Fund holdings in Hong Kong and Germany, both of which performed poorly in local currencies and U.S. dollars. Due to the short time since inception and the fact that most of GPF's assets were cash equivalents during this period, these are not particularly meaningful. Security Selection. Property stocks are selected using a three tier process. First, country weightings are established utilizing our country models of relative (real estate) securities index values. Second, property markets are analyzed to identify prospective trends that affect each property type and, to the extent meaningful, regional trends within countries. Finally, fundamental property and securities analysis are used to select securities of undervalued companies. Outlook. The outlook for property stocks varies by country. Hong Kong, which has had two years of phenomental property stock performance, appears likely to suffer from increasing supply of luxury residential and office properties. Thailand and Indonesia likewise are excepted to suffer from oversupplies of office and luxury residential properties. Elsewhere in the Pacific Rim, the outlook appears to favor Australia, Malaysia, Philippines, Singapore and, perhaps eventually, Japan. We remain bullish on property stocks in the Netherlands, Portugal, and Spain. The prospects for North American companies continue to be good, led by a strong US economy and positive cyclical property trends for most product types. The view expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management. They are not meant as investment advice. - ---------------- /1/ The returns for this period are for comparative purpose only since the GPR index is only available on a monthly basis. GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the period from November 25, 1996 (commencement of operations) to February 28, 1997, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian provides a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 22, 1997 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------ MUTUAL FUNDS -- 100.0% 437,684 GMO Core Fund (Class III Shares) 8,806,197 130,166 GMO Currency Hedged International Bond Fund (Class III Shares) 1,582,813 176,768 GMO Currency Hedged International Core Fund (Class III Shares) 2,243,181 62,659 GMO Emerging Country Debt Fund (Class III Shares) 882,868 231,361 GMO Emerging Markets Fund (Class III Shares) 2,889,694 69,812 GMO Growth Fund (Class III Shares) 361,628 32,020 GMO International Bond Fund (Class III Shares) 345,170 187,981 GMO International Core Fund (Class III Shares) 4,582,973 29,620 GMO International Small Companies Fund (Class III Shares) 398,689 219,395 GMO REIT Fund (Class III Shares) 2,768,763 127,025 GMO Small Cap Growth Fund (Class III Shares) 1,247,387 150,731 GMO Small Cap Value Fund (Class III Shares) 2,395,114 154,023 GMO Value Fund (Class III Shares) 2,287,237 ----------- TOTAL MUTUAL FUNDS (COST $30,414,082) 30,791,714 ----------- SHORT-TERM INVESTMENT -- 0.0% REPURCHASE AGREEMENT -- 0.0% $ 1,470 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $1,470 and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $1,501. 1,470 ----------- TOTAL SHORT-TERM INVESTMENT (COST $1,470) 1,470 ----------- TOTAL INVESTMENTS -- 100.0% (Cost $30,415,552) * 30,793,184 Other Assets and Liabilities (net) (6,605) ----------- TOTAL NET ASSETS -- 100% $30,786,579 =========== NOTES TO THE SCHEDULE OF INVESTMENTS: * The aggregate identified cost for federal income tax purposes is $30,538,666, resulting in gross unrealized appreciation and depreciation of $594,909 and $340,391, respectively, and net unrealized appreciation of $254,518.
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 28, 1997 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $30,415,552) (Note 1) $30,793,184 Receivable for expenses waived or borne by Manager (Note 2) 6,119 ----------- Total assets 30,799,303 ----------- LIABILITIES: Accrued expenses 12,724 ----------- Total liabilities 12,724 ----------- NET ASSETS $30,786,579 =========== NET ASSETS CONSIST OF: Paid-in-capital $29,871,668 Accumulated undistributed net investment loss (8) Accumulated undistributed net realized gain 537,287 Net unrealized appreciation 377,632 ----------- $30,786,579 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $30,786,579 =========== SHARES OUTSTANDING: Class III 2,988,868 =========== NET ASSET VALUE PER SHARE: Class III $ 10.30 ===========
2 See accompanying notes to the financial statements. GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- PERIOD FROM NOVEMBER 25, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 202,100 Interest 269 ---------- Total income 202,369 ---------- EXPENSES: Audit fees 14,179 Registration fees 2,495 Custodian and transfer agent fees 1,509 Legal fees 125 Miscellaneous 803 Fees waived or borne by Manager (Note 2) (19,111) ---------- Net expenses -- ---------- Net investment income 202,369 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (121,668) Realized gain distributions from investment company shares 793,873 ---------- Net realized gain 672,205 ---------- Change in net unrealized appreciation (depreciation) on investments 377,632 ---------- Net realized and unrealized gain 1,049,837 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,252,206 ==========
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 - --------------------------------------------------------------------------------
PERIOD FROM NOVEMBER 25, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ----------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 202,369 Net realized gain 672,205 Change in net unrealized appreciation (depreciation) 377,632 ----------- Net increase in net assets resulting from operations 1,252,206 ----------- Distributions to shareholders from: Net investment income Class III (202,377) ----------- Net realized gains Class III (134,918) ----------- (337,295) ----------- Net share transactions: (Note 5) Class III 29,871,668 ----------- Increase in net assets resulting from net share transactions 29,871,668 ----------- Total increase in net assets 30,786,579 NET ASSETS: Beginning of period -- ----------- End of period (including accumulated undistributed net investment loss of ($8)) $30,786,579 ===========
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 THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM NOVEMBER 25, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ----------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 ------- Income from investment operations: Net investment income 0.12 Net realized and unrealized gain 0.38 ------- Total from investment operations 0.50 ------- Less distributions to shareholders: From net investment income (0.12) From net realized gains (0.08) ------- Total distributions (0.20) ------- NET ASSET VALUE, END OF PERIOD $ 10.30 ======= TOTAL RETURN(A) 5.09% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $30,787 Net expenses to average daily net assets 0.00%* Net investment income to average daily net assets 3.21%* Portfolio turnover rate 10% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.01
(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. * 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 28, 1997 - -------------------------------------------------------------------------------- 1.SIGNIFICANT ACCOUNTING POLICIES The GMO Global (U.S.+) Equity Allocation Fund (the "Fund"), which commenced operations on November 25, 1996, 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 a 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 primarily in Class III shares of domestic equity, international equity, and fixed income funds of the Trust. The Fund offers three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. At February 28, 1997, Class III was the only active class of shares of the Fund. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 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. 6 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. 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. 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. 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 in such manner as deemed equitable by the Trustees, 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 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. 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 .42% of the amount invested. In the case of cash redemptions, the fee is .05% of the amount redeemed. All purchase premiums and redemption fees are paid to and recorded as paid-in capital by the Fund. For the period ended February 28, 1997, the Fund received $102,341 in purchase premiums and $325 in redemption fees. There is no premium for reinvested distributions or in- kind transactions. 7 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 fees from the underlying funds in which the Fund invests. The Fund has adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .13% for Class I shares and .07% for Class II shares. No shareholder service fee is charged for Class III shares. GMO has agreed to reimburse all expenses until further notice (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses). For the period ended February 28, 1997, the Fund incurred no Trustees' fees. 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 28, 1997, aggregated $32,862,850 and $2,327,100, respectively. 4.PRINCIPAL SHAREHOLDERS At February 28, 1997, 51% 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 November 25, 1996 (commencement of operations) to February 28, 1997 Class III: ------------------------------ Shares Amount -------------- --------------- Shares sold 3,086,368 $ 30,859,765 Shares issued to shareholders in reinvestment of distributions -- -- Shares repurchased (97,500) (988,097) ------------- --------------- Net increase 2,988,868 $ 29,871,668 ============= ===============
8 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, Ban Otterloo & Co. LLC for more than fifteen years. Mr. Inker has been with the firm for five years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the Global (U.S.+) Equity Allocation Fund returned 5.1% for three months from its inception (November 25, 1996) to February 28, 1997. During that period the Fund's benchmark (75% S&P 500/25% GMO EAFE-Lite Extended) returned 3.8%. During this period, the U.S. equity market performed strongly, although the market paused for breath in December following Federal Reserve Chairman Greenspan's concerns of "irrational exuberance" in the market. The underweighting of U.S. equities in the Global (U.S.+) Equity Allocation Fund therefore contributed negatively to performance for the year, but was more than offset by the strong performance of emerging equities, emerging debt, and real estate investment trusts (REITs). We use GMO's long-term asset class forecasts to allocate the Global (U.S.+) Equity Allocation Fund among various GMO mutual funds. From the inception of the Fund we have felt that the U.S. stock market is significantly overvalued. The market's subsequent climb has only made this situation more extreme. Our research suggests that from the market's current valuation level, prospective returns for large capitalization U.S. stocks over the next 10 years will be very disappointing, with a forecasted average annual return of only 3% per year. The Fund is underweight in U.S. stocks in the portfolio by approximately 15% relative to the benchmark, which negatively impacted the Fund's overall performance due to the continuing rally of U.S. equities relative to the international markets during the period. Within U.S. stocks, we have tilted the portfolio towards the most attractively valued sectors: small stocks, where we have a 6% overweighting, and real estate investment trusts (REITs), where our overweighting is 5%. Since the Fund's inception, the allocation to REITs has helped performance, as the GMO REIT Fund outperformed the aggregate U.S. market by 6% over the period. Small stocks, on the other hand, lagged by approximately 2%. Within the international equity portion of the portfolio, we have overweighted emerging equities significantly. This has been a real boost to the portfolio, as the last three months have been strong for emerging stocks, with the GMO Emerging Markets Fund up over 16% in the period. In December we allocated 9% of the Fund to fixed income of which 6% was to international bonds and 3% to emerging country debt. Due to the strong performance of emerging country debt, the fixed income portion of the portfolio outperformed U.S. equities during this period. Because of our very bearish view of the U.S. equity market, we feel a reasonably sized fixed income position is excellent protection against future weakness in the U.S. equity market. 9 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- Until we see a significant correction in U.S. equities, it is likely that the Fund will maintain its bearish stance. The moderately sized fixed income position should provide a degree of protection in a bear market, and we believe that international stocks, particularly in emerging markets, will perform better than those in the U.S. In addition, REITs should do well in the current market environment, providing more attractive yields and valuations than those available from the high valuation levels of U.S. equities. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co LLC Management. They are not meant as investment advice. 10 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the period from October 11, 1996 (commencement of operations) to February 28, 1997, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian, provides a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 22, 1997 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997 See accompanying notes to the financial statements.
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- MUTUAL FUNDS -- 100.0% 63,365 GMO Emerging Country Debt Fund (Class III Shares) 892,813 740,649 GMO Emerging Markets Fund (Class III Shares) 9,250,711 112,516 GMO International Bond Fund (Class III Shares) 1,212,927 1,347,477 GMO International Core Fund (Class III Shares) 32,851,479 130,012 GMO International Small Companies Fund (Class III Shares) 1,749,966 ------------ TOTAL MUTUAL FUNDS (COST $45,402,045) 45,957,896 ------------ SHORT-TERM INVESTMENT -- 0.0% REPURCHASE AGREEMENT -- 0.0% $ 1,461 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $1,462 and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $1,492. 1,461 ------------ TOTAL SHORT-TERM INVESTMENT (COST $1,461) 1,461 ------------ TOTAL INVESTMENTS -- 100.0% (Cost $45,403,506) * 45,959,357 Other Assets and Liabilities (net) (10,455) ------------ TOTAL NET ASSETS -- 100% $ 45,948,902 ============ NOTES TO THE SCHEDULE OF INVESTMENTS: * The aggregate identified cost for federal income tax purposes is $45,404,996, resulting in gross unrealized appreciation and depreciation of $1,165,661 and $611,300, respectively, and net unrealized appreciation of $554,361.
1 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES--FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $45,403,506) (Note 1) $45,959,357 Receivable for expenses waived or borne by Manager (Note 2) 4,162 ----------- Total assets 45,963,519 ----------- LIABILITIES: Payable to affiliate for (Note 2): Shareholder service fee 829 Accrued expenses 13,788 ----------- Total liabilities 14,617 ----------- NET ASSETS $45,948,902 =========== NET ASSETS CONSIST OF: Paid-in-capital $44,676,974 Accumulated undistributed net realized gain 716,077 Net unrealized appreciation 555,851 ----------- $45,948,902 =========== NET ASSETS ATTRIBUTABLE TO: Class II shares $15,489,842 =========== Class III shares $30,459,060 =========== SHARES OUTSTANDING: Class II 1,487,501 =========== Class III 2,925,208 =========== NET ASSET VALUE PER SHARE: Class II $ 10.41 =========== Class III $ 10.41 ===========
See accompanying notes to the financial statements. 2 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) See accompanying notes to the financial statements. STATEMENT OF OPERATIONS -- PERIOD FROM OCTOBER 11, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 260,527 Interest 123 ---------- Total income 260,650 ---------- EXPENSES: Audit fees 14,049 Custodian and transfer agent fees 4,528 Registration fees 2,346 Legal fees 301 Trustees fees (Note 2) 42 Miscellaneous 558 Fees waived or borne by Manager (Note 2) (21,198) ---------- 626 Shareholder service fee (Note 2) Class II 1,962 ---------- Net expenses 2,588 ---------- Net investment income 258,062 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Investments (1,487) Realized gain distributions from investment company shares 833,034 ---------- Net realized gain 831,547 ---------- Change in net unrealized appreciation (depreciation) on investments 555,851 ---------- Net realized and unrealized gain 1,387,398 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,645,460 ==========
3 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD FROM OCTOBER 11, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ---------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 258,062 Net realized gain 831,547 Change in net unrealized appreciation (depreciation) 555,851 ----------- Net increase in net assets resulting from operations 1,645,460 ----------- Distributions to shareholders from: Net investment income Class II (98,709) Class III (159,298) ----------- Total distributions from net investment income (258,007) ----------- Net realized gains Class II (44,198) Class III (71,327) ----------- Total distributions from net realized gains (115,525) ----------- (373,532) ----------- Net share transactions: (Note 5) Class II 15,022,907 Class III 29,654,067 ----------- Increase in net assets resulting from net share transactions 44,676,974 ----------- Total increase in net assets 45,948,902 NET ASSETS: Beginning of period -- ----------- End of period $45,948,902 ===========
See accompanying notes to the financial statements. 4 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS II SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM DECEMBER 23, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ----------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.10 ------- Income from investment operations: Net investment income -- (b) Net realized and unrealized gain 0.41 ------- Total from investment operations 0.41 ------- Less distributions to shareholders: From net investment income (0.07) From net realized gains (0.03) ------- Total distributions (0.10) ------- NET ASSET VALUE, END OF PERIOD $ 10.41 ======= TOTAL RETURN(A) 4.07 % RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $15,490 Net expenses to average daily net assets 0.07 %* Net investment income to average daily net assets (0.07)%*(b) Portfolio turnover rate 0 % Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: (c)
(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) 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) Fees and expenses waived or borne by the Manager were less than $0.01 per share. * Annualized. See accompanying notes to the financial statements. 5 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM OCTOBER 11, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ---------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 ------- Income from investment operations: Net investment income 0.10 (b) Net realized and unrealized gain 0.41 ------- Total from investment operations 0.51 ------- Less distributions to shareholders: From net investment income (0.07) From net realized gains (0.03) ------- Total distributions (0.10) ------- NET ASSET VALUE, END OF PERIOD $ 10.41 ======= TOTAL RETURN(A) 5.11% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $30,459 Net expenses to average daily net assets 0.01%* Net investment income to average daily net assets 3.60%*(b) Portfolio turnover rate 0% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.01
(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) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. * Annualized. See accompanying notes to the financial statements. 6 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 1.SIGNIFICANT ACCOUNTING POLICIES The GMO International Equity Allocation Fund (the "Fund"), which commenced operations on October 11, 1996, 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 a total return greater than that of the Morgan Stanley Capital International Europe, Australia and Far East Index. The Fund will pursue its objective by investing primarily in Class III shares of international equity and fixed income funds of the Trust. The Fund offers three classes of shares: Class I, Class II and Class III. The principal economic difference among 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 generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 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. 7 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules from generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ----------------- ------------------------ --------------- ($55) $55 --
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. 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. 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 in such manner as deemed equitable by the Trustees, 8 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 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. 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 .10% of the amount redeemed. Prior to October 16, 1996, the Fund did not charge a premium on cash purchases or a fee on redemptions. All purchase premiums and redemption fees are paid to and recorded as paid-in capital by the Fund. For the period ended February 28, 1997, the Fund received $248,112 in purchase premiums and no redemption fees. There is no premium for reinvested distributions or in-kind transactions. 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 fees from the underlying funds in which the Fund invests. The Fund has adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .13% for Class I shares and .07% for Class II shares. No shareholder service fee is charged for Class III shares. GMO has agreed to reimburse all expenses until further notice (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses). Prior to November 25, 1996, GMO had agreed to reimburse these expenses to the extent that the Fund's annual 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 period ended February 28, 1997 was $42. 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 28, 1997, aggregated $45,486,622 and $83,090, respectively. 9 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 4.PRINCIPAL SHAREHOLDERS At February 28, 1997, 100% of the outstanding Class II shares of the Fund were held by one shareholder and 78% of the outstanding Class III shares of the Fund were held by five shareholders, each holding in excess of 10% of the outstanding shares of the respective class. 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 23, 1996 (commencement of operations) to February 28, 1997 Class II: ----------------------------- Shares Amount ----------------------------- Shares sold 1,473,267 $ 14,880,000 Shares issued to shareholders in reinvestment of distributions 14,234 142,907 Shares repurchased -- -- ------------- --------------- Net increase 1,487,501 $ 15,022,907 ============= =============== Period from October 11, 1996 (commencement of operations) to February 28, 1997 Class III: ----------------------------- Shares Amount ----------------------------- Shares sold 2,910,529 $ 29,506,688 Shares issued to shareholders in reinvestment of distributions 14,679 147,379 Shares repurchased -- -- ------------- --------------- Net increase 2,925,208 $ 29,654,067 ============= ===============
10 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION--(UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 11.78% of distributions as net capital gain dividends. 11 GMO INTERNATIONAL 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 five years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the International Equity Allocation Fund returned 5.1% from its inception (October 11, 1996) to February 28, 1997. During that period the benchmark (GMO EAFE-Lite Extended) returned 3.8%. We use GMO's long-term asset class forecasts to allocate the International Equity Allocation Fund among various GMO mutual funds. Our research suggests that the next several years will be difficult ones for the developed international stock markets, with returns of only 5% to 6% per year, well down from the 15% average of the last 20 years. Our forecast for emerging equities is somewhat better, although even they will be unlikely to provide a double-digit average return over the next 10 years. The Fund's overweight in emerging markets (approximately 9%) has added value as the emerging markets outperformed the benchmark on an indexed basis by 5% during the period. In December we added fixed income exposure to the portfolio, and the current allocation to fixed income allocation is 4.5% of the total portfolio. Of this amount, 2.7% was allocated to international bonds and 1.8% to emerging country debt. Due to the strong performance of emerging country debt, the fixed income portion of the portfolio has outperformed international equities over this period, adding value to the Fund's relative performance. Because of our bearish view on international equities, particularly those in developed countries, we feel that a moderate allocation to fixed income should provide an important degree of protection against a market correction. In addition, the better values and higher growth prospects provided by emerging equities should help them hold value better than developed markets in the event of a global equity market downturn. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management. They are not meant as investment advice. 12 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the period from December 31, 1996 (commencement of operations) to February 28, 1997, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers, provides a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 10, 1997 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------- COMMON STOCKS -- 90.3% AEROSPACE -- 0.7% 6,100 AAR Corp 155,550 16,200 Gencorp Inc 305,775 5,300 Logicon Inc 200,075 4,100 OEA, Inc 190,138 13,500 Rohr Industries Inc * 244,688 ------------ 1,096,226 ------------ AUTOMOTIVE -- 2.1% 22,000 Arvin Industries Inc 517,000 7,000 Breed Technologies Inc 153,125 18,600 Coachmen Industries Inc 376,650 27,500 Mascotech Industries Inc 522,500 5,900 Simpson Industries Inc 57,525 22,500 SPX Corp 1,032,187 11,500 Standard Products Corp 270,250 14,400 Thor Industries 370,800 ------------ 3,300,037 ------------ BANKING AND FINANCIAL SERVICES -- 6.5% 4,150 Alex Brown Inc 241,219 8,200 Astoria Financial Corp 352,600 9,400 Bancorp Hawaii Inc 413,600 15,500 Banponce Corp 558,000 5,560 California Federal Bancorp, Inc. SCLP 104,250 6,300 City National Corp 152,775 12,300 Cityscape Financial Corp 336,713 13,100 Comdisco Inc 407,738 7,500 Credit Acceptance Corp * 159,375 29,900 Dime Bancorp Inc * 523,250 3,100 Donaldson Lufkin & Jenrette 133,300 8,400 Downey Financial Corp 198,450 5,600 Eaton Vance Corp 247,800 7,500 Finova Group Inc 572,813 1,100 First Empire State Corp 355,850 18,500 First Federal Financial Corp * 481,000 2,500 Firstmerit Corp 100,625
See accompanying notes to the financial statements. 1 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------- BANKING AND FINANCIAL SERVICES -- CONTINUED 1,000 Fund American Enterprises Inc 106,500 7,300 Glendale Federal Savings Bank 194,363 2,100 Great Financial Corp 68,513 5,700 Greenpoint Financial Corp 342,000 3,500 Interra Financial Inc 143,063 6,700 Jefferies Group Inc 295,638 5,500 Legg Mason Inc 244,750 25,500 Money Store Inc 659,813 3,600 Northfork Bancorp 146,250 2,310 Old National Bancorp 85,470 10,800 Provident Bancorp Inc 402,300 17,000 Riggs National Corp 338,938 9,500 St. Paul Bancorp Inc 251,750 7,800 Standard Federal Bancorp 449,475 4,000 Student Loan Group 161,500 1,300 UMB Financial Corp 55,250 21,100 United Asset Management Corp 569,700 7,920 Washington Federal Inc 201,960 2,800 Zions Bancorporation 348,600 ------------ 10,405,191 ------------ CHEMICALS -- 1.4% 2,700 Betzdearborn Inc 175,163 9,400 Crompton & Knowles Corp 178,600 11,200 Dexter Corp 330,400 6,000 Fuller (HB) Co 292,500 14,900 Hanna (MA) Co 309,175 6,600 Lilly Industrial Coating Inc, Class A 127,875 4,600 Macdermid Inc 154,100 59,300 Schuller Corp 704,187 ------------ 2,272,000 ------------ COMPUTER AND OFFICE EQUIPMENT -- 3.6% 42,200 Amdahl Corp * 416,725 2,300 Analogic Corp 81,363 22,000 Banctec Inc * 561,000 18,300 Comverse Technology Inc * 798,337 15,700 Concord EFS Inc 371,894 18,100 Dynatech Corp * 506,800
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 28, 1997
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------- COMPUTER AND OFFICE EQUIPMENT -- CONTINUED 13,900 Exabyte Corp 152,031 9,000 HMT Technology Corp 172,125 4,800 Lexmark International Group Inc 133,800 43,700 Micron Electronics Inc * 846,687 5,000 Quantum Corp * 198,750 10,600 Rational Software Corp 274,275 17,400 Unisys Corp * 117,450 11,000 Western Digital Corp 649,000 21,600 Xircom Inc 429,300 ------------ 5,709,537 ------------ CONSTRUCTION -- 0.6% 19,300 Centex Corp 779,237 3,300 Kaufman & Broad Home Corp 46,613 2,500 Texas Industries Inc 145,625 ------------ 971,475 ------------ CONSUMER GOODS -- 6.3% 14,181 Block Drug Co Inc, Class A 659,417 12,000 Burlington Industries Inc 154,500 5,200 Carter Wallace Inc 74,750 2,300 CDW Computer Centers Inc 120,894 3,800 Church & Dwight Co Inc 101,175 16,600 Furniture Brands International Inc * 244,850 9,000 Genesco Inc * 85,500 8,700 Golden Books Family Entertainment Inc 81,563 20,200 Hon Industries Inc 772,649 9,500 Huffy Corp 124,688 26,200 Jones Apparel Group Inc 972,674 11,400 Kimball International, Class B 450,300 15,300 Miller Herman Inc 1,005,974 6,100 O'Sullivan Industries Holdings Inc 65,575 19,700 Paragon Trade Brands Inc 359,525 4,600 Pittston Brinks Group 118,450 14,200 Russ Berrie and Co 307,075 13,600 Russell Corp 511,700 4,900 Safeguard Scientifics Inc 118,825 18,300 Standard Register Co 597,038 58,000 Tech Data Corp * 1,391,999 19,500 Tiffany & Co 677,625 49,000 Tultex Corp * 392,000
See accompanying notes to the financial statements. 3 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------- CONSUMER GOODS -- CONTINUED 9,800 US Industries Inc 358,925 11,300 Vans Inc 153,963 6,100 Wallace Computer Services 206,638 ------------ 10,108,272 ------------ ELECTRONIC EQUIPMENT -- 5.7% 18,000 Amati Communications Corp 249,750 6,100 American Power Conversion Corp * 127,338 5,300 Applied Magnetics Corp * 206,038 42,200 Aspect Telecommunications Corp 1,049,724 3,300 C-Cube Microsystems Inc* 96,113 22,700 Checkpoint Systems Inc * 462,513 5,500 Chips & Technologies Inc 70,125 2,000 Chyron Corp 11,500 18,400 Computer Products Inc * 315,100 18,500 Digital Microwave Corp 462,500 14,200 DSP Communications Inc 165,963 7,900 Jabil Circuit Inc 261,688 33,700 Magnetek Inc 560,263 14,500 Microchip Technology Inc 541,938 10,900 Oak Industries Inc * 220,725 19,200 Octel Communications Corp 350,400 9,800 Read Rite Corp 300,738 3,400 Sanmina Corp 157,250 27,300 SCI Systems Inc * 1,460,549 6,000 Symbol Technologies Inc 301,500 7,700 Symmetricom Inc * 124,163 4,200 Technitrol Inc 187,950 4,600 Telco Systems Inc 71,300 1,400 Valmont Inds Inc 59,150 6,400 Vitesse Semiconductor Corp 268,400 8,400 VLSI Technology 156,975 88,200 Zenith Electronics Corp * 848,924 ------------ 9,088,577 ------------ FOOD AND BEVERAGE -- 4.6% 7,700 Coors (Adolph) Co 164,588 24,800 Dean Foods Co 809,099 8,000 Dekalb Genetics Corp 522,000 18,000 Dimon Inc 423,000 27,900 Flowers Industries Inc 645,188
4 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 28, 1997
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------- FOOD AND BEVERAGE -- CONTINUED 15,900 Great Atlantic & Pacific Tea Co 473,025 20,200 Hudson Foods Inc 353,500 2,400 Imperial Holly Corp * 28,800 25,400 Interstate Bakeries Corp 1,187,449 9,700 Quality Food Centers Inc * 355,263 5,600 Riser Foods Inc, Class A 175,000 23,800 Ryans Family Steak House * 175,525 10,400 Savannah Foods and Industries Inc 152,100 30,400 Showbiz Pizza Time 638,400 14,700 Smith Food and Drug Center, Class B 483,263 24,500 Universal Corporation 771,749 ------------ 7,357,949 ------------ HEALTH CARE -- 5.3% 11,000 Acuson Corp * 305,250 6,000 Advanced Technology Labs Inc * 213,000 4,800 Air & Water Technologies Corp 27,300 68,700 Bio Technology General Corp * 1,116,374 9,700 Columbia Laboratories Inc * 147,925 18,200 Curative Health Services Inc 459,550 3,700 Dionex Corp * 166,500 33,200 Herbalife International Inc 697,199 1,800 Labone Inc 33,975 34,400 Lincare Holdings Inc * 1,483,499 6,400 MTS Systems Inc 139,200 18,600 NBTY Inc * 334,800 62,000 Novacare Corp * 774,999 32,200 Prime Medical Service Inc * 358,225 8,800 Rexall Sundown Inc 229,900 5,200 Safeskin Corp 96,200 3,000 Sybron International Corp * 89,250 18,630 Tenet Healthcare Corp * 505,339 24,500 Universal Health Services, Class B 836,062 29,400 US Bioscience Inc 415,275 ------------ 8,429,822 ------------ INSURANCE -- 5.1% 4,600 American Bankers Insurance Group 253,575 6,700 Capital Re Corp 289,775 3,300 Capitol American Financial Corp 120,038 8,700 CMAC Investment Corp 304,500
See accompanying notes to the financial statements. 5 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------- INSURANCE -- CONTINUED 600 Conseco Inc 23,550 7,900 Crawford and Co 177,750 23,760 Delphi Financial Group Inc 807,839 24,700 Enhance Financial Services Group Inc 852,149 17,800 Everest Re Holdings Inc 560,700 12,600 First American Financial Corp 516,600 23,700 Fremont General Corp 684,337 17,359 Frontier Insurance Group Inc 750,776 10,500 Guaranty National Corp 187,688 6,100 HCC Insurance Holdings Inc 150,213 5,800 Life Re Corp 249,400 1,300 Markel Corp * 141,700 6,400 Orion Capital 409,600 3,400 Penncorp Financial Group Inc 119,000 10,000 Presidential Life Corp 150,000 13,800 Provident Cos Inc 752,099 10,800 United Wisconsin Services 287,550 9,300 Zenith National Insurance Corp 246,450 3,400 Zurich Reinsurance Centre Inc 130,475 ------------ 8,165,764 ------------ MACHINERY -- 2.7% 5,800 Camco International Inc 224,025 12,300 Cooper Cameron Corp 805,649 4,300 Donaldson Co Inc 144,588 1,700 ETEC Systems Inc 61,625 5,500 Fairchild Corp, Class A * 77,000 2,300 Goulds Pumps Inc 54,194 5,800 Graco Inc 180,525 12,300 Kaydon Corp 531,975 3,800 Lindsay Manufacturing Co 176,700 15,800 Mohawk Industries Inc * 416,725 20,400 Smith International Inc * 828,749 13,100 US Filter Corp 458,500 14,200 Varco International Inc * 319,500 ------------ 4,279,755 ------------ MANUFACTURING -- 3.2% 19,200 ACX Technologies Inc * 367,200 3,400 Applied Power Inc, Class A 133,025 2,200 Barnes Group Inc 146,575
6 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 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------- MANUFACTURING -- CONTINUED 12,200 BMC Industries Inc 349,225 21,700 Champion Enterprises Inc 420,438 4,600 Crane Co 150,075 28,800 Gentex Corp 532,800 11,600 Global Industrial Technologies Inc 205,900 13,000 Hexcel Corp * 250,250 12,050 Manitowoc Co Inc 405,181 9,200 Robbins & Myers Inc 253,000 7,100 Sequa Corp, Class A * 278,675 10,800 Skyline Corp 260,550 900 SPS Technologies, Inc * 57,600 4,700 Synetic Inc * 228,538 13,900 Tredegar Industries 557,738 8,700 Watts Industries Inc, Class A 225,113 20,200 Wyman-Gordon Co. * 361,075 ------------ 5,182,958 ------------ METALS AND MINING -- 0.3% 19,400 Oregon Metallurgical Corp * 426,800 7,200 Sturm Ruger & Co Inc 125,100 ------------ 551,900 ------------ OIL AND GAS -- 12.1% 6,900 Atwood Oceanics Inc * 362,250 4,000 Benton Oil & Gas Co * 61,000 14,800 Berry Petroleum, Class A 218,300 17,500 BJ Services Co 695,624 7,400 Brown (Tom) Inc * 136,900 9,100 Cabot Oil & Gas Corp, Class A 144,463 9,900 Chesapeake Energy Corp 205,425 8,800 Devon Energy Corp 275,000 23,600 El Paso Natural Gas Co 1,265,549 17,200 Energy Ventures Inc * 877,199 24,400 Falcon Drilling Co Inc 826,549 13,600 Flores & Rucks Inc 612,000 8,900 Giant Industries Inc 123,488 38,100 Harken Energy Corp * 185,738 19,800 Helmerich & Payne Inc 836,549 10,300 KCS Energy Inc 370,800 7,200 Laclede Gas Co 166,500 33,000 Marine Drilling Co Inc * 499,125
See accompanying notes to the financial statements. 7 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------- OIL AND GAS -- CONTINUED 47,500 Mesa Inc 290,938 23,800 Mitchell Energy, Class B 511,700 36,000 Nabors Industries Inc * 553,500 16,300 National Fuel Gas Co 700,899 18,900 Newfield Exploration Co 375,638 30,700 Noble Drilling Corp 544,925 29,900 Noram Energy Corp 448,500 5,050 North Carolina Natural Gas 162,231 2,900 Nuevo Energy Co 120,350 22,400 Oneok Inc 638,400 13,900 Oryx Energy Co * 278,000 22,600 Parker & Parsley Petroleum Co 666,700 14,700 Peoples Energy Corp 497,963 8,100 Piedmont Natural Gas Co 191,363 10,900 Pogo Producing Co 374,688 17,600 Pool Funds Energy Services Co 244,200 45,300 Reading & Bates Corp * 1,098,524 49,200 Rowan Cos Inc * 977,849 5,100 RPC Inc 75,225 43,900 Santa Fe Energy Resources Inc * 565,213 32,100 Seagull Energy Corp * 589,838 27,700 Southwestern Energy Co 373,950 12,900 Transocean Offshore Inc 720,787 7,500 Union Texas Petroleum Holdings Inc 138,750 8,000 United Meridian Corp 241,000 3,200 Vintage Petroleum Inc 96,400 ------------ 19,339,990 ------------ PAPER AND ALLIED PRODUCTS -- 1.5% 6,400 Caraustar Industries Inc 190,400 18,200 Fort Howard Corp 541,450 1,900 Glatfelter (PH) Co 32,538 3,600 Mosinee Paper Corp 119,700 2,800 Pentair Inc 87,850 22,500 Pope And Talbot Inc 348,750 5,200 Shorewood Packaging Corp * 91,000 8,800 TJ International Inc 178,200 25,400 US Office Products Co 812,799 ------------ 2,402,687 ------------
8 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 28, 1997
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------- PHARMACEUTICALS -- 1.7% 1,000 Alliance Pharmaceutical Corp * 12,500 2,700 Dura Pharmaceuticals Inc 90,788 32,900 General Nutrition Cos Inc * 592,200 9,100 ICN Pharmaceuticals Inc 229,775 10,100 International Specialty Products Inc * 135,088 9,100 Jones Medical Industries Inc 275,275 13,400 Medpartners Inc 294,800 7,500 Nexstar Pharmaceuticals Inc 111,563 2,800 Quintiles Transnational Corp * 183,050 51,200 Sequus Pharmaceuticals Inc * 588,800 3,100 Watson Pharmaceutical, Inc 135,238 ------------ 2,649,077 ------------ PRIMARY MATERIALS -- 1.4% 5,800 Carlisle Cos Inc 189,950 5,600 Kuhlman Corp 131,600 6,100 Medusa Corp 243,238 26,700 Premark International Inc 630,788 5,900 Schulman A Inc 114,313 7,100 Sealed Air Corp * 291,988 14,600 Southdown, Inc 521,950 4,500 USG Corp 158,625 ------------ 2,282,452 ------------ PRIMARY PROCESSING -- 1.2% 6,300 Intermet Corp 95,288 11,700 Lone Star Technologies Inc 184,275 5,300 Mueller Industries Inc * 228,563 5,900 National Steel Corp, Class B 49,413 16,700 Oregon Steel Mills Inc 283,900 5,400 Petrolite Corp 313,200 9,000 Precision Castparts Corp 441,000 8,500 Quanex Corp 227,375 2,000 Tremont Corp * 67,750 ------------ 1,890,764 ------------ PRINTING AND PUBLISHING -- 1.4% 16,600 Central Newspapers, Class A 763,599 15,700 Harland (JH) Co 474,925 3,200 Harte Hanks Communications 82,800 23,975 McClatchy Newspapers Inc 572,403
See accompanying notes to the financial statements. 9 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------- PRINTING AND PUBLISHING -- CONTINUED 2,700 Media General Inc, Class A 81,000 10,500 Playboy Enterprises Inc, Class B 160,125 ------------ 2,134,852 ------------ REAL ESTATE -- 0.1% 600 Penn Virginia Corp 26,700 100 Security Capital Corp 8,675 9,200 Sothebys Holdings Inc 156,400 ------------ 191,775 ------------ REFINING -- 0.6% 18,100 Tesoro Petroleum Corp * 212,675 4,500 Tosco Corp 125,438 17,700 Valero Energy Corp 557,550 ------------ 895,663 ------------ RETAIL TRADE -- 8.5% 7,200 AnnTaylor Stores Corp 144,000 29,000 Apogee Enterprises Inc 576,375 6,700 Arbor Drugs Inc 128,975 7,600 Bed, Bath & Beyond Inc 197,600 9,800 Brown Group Inc 159,250 10,300 Buckle (The) Inc 260,075 19,300 Cash American Investments Inc 183,350 70,100 Charming Shoppes Inc * 311,069 44,550 Claire's Stores Inc 629,269 22,800 CompUSA Inc 456,000 3,800 Consolidated Stores Corp 133,475 15,500 Dress Barn Inc * 265,438 5,900 Duty Free International Inc 84,075 35,800 Eagle Hardware & Garden Inc * 698,099 7,000 Family Dollar Stores Inc 165,375 38,200 Finish Line Inc 821,299 6,800 Goodys Family Clothing Inc * 123,250 8,300 Gymboree Corp * 204,388 13,600 Heilig Meyers Co 192,100 11,900 Ingles Markets Inc 178,500 30,500 Lands End Inc * 846,374 13,100 Macfrugals Bargains Close Outs Inc * 355,338 20,800 Meyer Fred Inc * 824,199 37,400 Neiman Marcus Group Inc * 1,005,124
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 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------- RETAIL TRADE -- CONTINUED 19,500 Pier 1 Imports Inc 338,813 12,200 Proffitts Inc 394,975 13,700 Richfood Holdings Inc 289,413 31,100 Ross Stores Inc 1,492,799 7,100 Ruddick Corp 113,600 9,000 Shopko Stores Inc 140,625 7,900 Stein Mart Inc * 187,625 26,300 Value City Department Stores Inc * 213,688 27,400 Wet Seal Inc 544,575 9,500 Williams-Sonoma Inc * 239,281 36,500 Zale Corp 675,250 ------------ 13,573,641 ------------ SERVICES -- 4.7% 6,600 ABM Industries Inc 123,750 33,000 Accustaff Inc 684,749 9,900 AMC Entertainment Inc * 164,588 4,400 Amerco 119,900 41,000 American Media Inc, Class A * 225,500 5,400 Apac Teleservices Inc 160,650 1,300 Apollo Group, Inc 35,100 2,500 Berlitz International Inc 50,625 4,500 Catalina Marketing Corp 226,125 11,700 CDI Corp * 383,175 8,800 Corestaff Inc 207,900 5,000 Cytogen Corp 25,625 3,200 Devry Inc 63,600 17,000 Jenny Craig Inc * 150,875 5,600 Lee Enterprises Inc 131,600 13,100 Mcgrath Rentcorp 352,063 7,200 Meredith Corp 352,800 8,000 Morningstar Group Inc * 184,000 45,000 National Education Corp * 579,375 18,800 Oakwood Homes Corp 371,300 21,600 Oceaneering International Inc * 342,900 9,400 PHH Corp 450,025 15,700 Prime Hospitality Corp 259,050 5,300 Promus Hotel Corp 187,488 14,200 Regis Corp 232,525 6,500 Rollins Truck Leasing Corp 91,000 16,000 Technology Solutions Co 474,000
See accompanying notes to the financial statements. 11 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------- SERVICES -- CONTINUED 8,500 Volt Information Sciences Inc * 380,375 18,900 Wackenhut Corp 330,750 4,200 Wolverine World Wide 149,100 ------------ 7,490,513 ------------ TECHNOLOGY -- 2.9% 21,400 3DO Company (The) 86,938 16,000 American Management Systems Inc * 280,000 4,900 Citrix Systems Inc 61,863 500 Compuware Corp 31,125 400 Data General Corp * 7,750 5,300 Electronic Arts * 165,625 24,000 Electronics For Imaging Inc 923,999 12,900 Genrad Inc * 256,388 6,100 Keane Inc 215,025 1,900 Mcafee Associates Inc 87,163 4,700 National Data Corp 165,088 3,700 Network Appliance Inc 148,000 8,600 Remedy Corp 330,025 17,600 Structural Dynamics Research Corp * 349,800 100,500 Tandem Computers Inc * 1,256,249 4,100 Vantive Corp 91,225 1,100 Viasoft Inc 39,600 6,600 Visio Corp 278,850 ------------ 4,774,713 ------------ TELECOMMUNICATIONS -- 0.4% 4,600 Atlantic Telecommunication Network Inc * 57,500 4,500 C-Tec Corp * 128,250 8,900 Heritage Media Corp 100,125 22,400 International Family Entertainment Inc * 428,400 ------------ 714,275 ------------ TRANSPORTATION -- 2.6% 5,300 Alaska Air Group Inc * 125,875 8,200 Alexander & Baldwin Inc 219,350 26,300 Comair Holdings Inc 542,438 13,300 Expeditors International Washington Inc 332,500 24,900 Fleetwood Enterprises Inc 647,400 1,400 Florida East Coast Industries Inc 136,675 13,100 Hunt (JB) Transportation Services Inc 181,763
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 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------ TRANSPORTATION -- CONTINUED 18,700 Mesa Airline Group Inc * 119,213 12,200 OMI Corp * 109,800 9,400 Swift Transportation Co * 250,275 8,300 US Freightways Corp 200,238 29,600 USAir Group Inc * 584,600 12,200 Werner Enterprises Inc 213,500 8,200 Wisconsin Central Transport 294,175 16,100 Yellow Corp * 251,563 ------------ 4,209,365 ------------ UTILITIES -- 3.1% 6,000 Aquila Gas Pipeline Corp 78,750 3,700 Atmos Energy Corp 90,650 20,600 Calenergy Inc * 687,524 13,500 Centerior Energy Corp 140,063 8,900 Commonwealth Energy Systems 199,138 10,000 Destec Energy Inc 207,500 9,200 Eastern Enterprises 309,350 5,100 Idaho Power Co 157,463 18,400 Midamerican Energy Holding Co 303,600 13,700 Nicor Inc 458,950 800 Northwestern Public Service Co 30,000 7,300 NUI Corporation 153,300 7,800 Public Services Co of New Mexico 143,325 12,100 TNP Enterprises Inc 316,113 22,500 Tucson Electric Power Co 337,500 3,200 UGI Corp 79,600 17,000 Washington Gas Light Co 376,125 11,800 Washington Water Power 216,825 22,900 Western Gas Resources Inc 426,513 5,800 Wicor Inc 203,725 ------------ 4,916,014 ------------ TOTAL COMMON STOCKS (COST $147,504,142) 144,385,244 ------------
See accompanying notes to the financial statements. 13 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 18.7% CASH EQUIVALENTS -- 9.1%(B) 5,000,000 American AAdvantage Money Market Fund 5,000,000 $4,501,593 Bank of Boston Eurodollar Time Deposit, 5.5375% due 3/3/97 4,501,593 $5,000,000 Harris Bank and Trust Eurodollar Time Deposit, 5.25% due 3/03/97 5,000,000 ------------- 14,501,593 ------------- U.S. GOVERNMENT -- 0.3% $ 500,000 U.S. Treasury Bill, 5.22% due 5/29/97(a) 493,873 ------------- REPURCHASE AGREEMENTS -- 9.3% $8,027,962 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $8,031,207 and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $8,197,215. 8,027,962 $6,908,554 Prudential Securities, Inc Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $6,911,301 and an effective yield of 4.77%, collateralized by U.S. Government Agency Obligations with rates ranging from 6.11% to 6.59%, with maturity dates ranging from 2/25/00 to 5/24/01 and with an aggregate market value of $7,046,802. 6,908,554 ------------- 14,936,516 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $29,931,739) 29,931,982 ------------- TOTAL INVESTMENTS -- 109.0% (Cost $177,435,881) ** 174,317,226 Other Assets and Liabilities (net) -- (9.0)% (14,419,125) ------------- TOTAL NET ASSETS -- 100% $ 159,898,101 ============= NOTES TO THE SCHEDULE OF INVESTMENTS: (a) Security has been segregated to cover margin requirements on open financial futures contracts. (b) Represents investments of security lending collateral (Note 1). * Non-income producing security. ** The aggregate identified cost for federal income tax purposes is $177,435,881, resulting in gross unrealized appreciation and depreciation of $6,145,961 and $9,264,616, respectively, and net unrealized depreciation of $3,118,655.
14 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $177,435,881) (Note 1) $174,317,226 Dividends and interest receivable 114,021 Receivable for variation margin on open futures contracts (Notes 1 and 6) 59,500 Receivable for expenses waived or borne by Manager (Note 2) 48,432 ------------ Total assets 174,539,179 ------------ LIABILITIES: Payable upon return of securities loaned (Note 1) 14,501,593 Payable to affiliate for (Note 2): Management fee 61,773 Shareholder service fee 18,532 Accrued expenses 59,180 ------------ Total liabilities 14,641,078 ------------ NET ASSETS $159,898,101 ============ NET ASSETS CONSIST OF: Paid-in-capital $163,108,546 Accumulated undistributed net investment income 173,151 Accumulated undistributed net realized gain 18,414 Net unrealized depreciation (3,402,010) ------------ $159,898,101 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $159,898,101 ============ SHARES OUTSTANDING: Class III 16,278,745 ============ NET ASSET VALUE PER SHARE: Class III $ 9.82 ============
See accompanying notes to the financial statements. 15 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- PERIOD FROM DECEMBER 31, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 200,679 Interest (including securities lending income of $4,823) 91,604 ----------- Total income 292,283 ----------- EXPENSES: Management fee (Note 2) 124,256 Audit fees 45,892 Custodian and transfer agent fees 10,089 Registration fees 3,780 Legal fees 1,160 Trustees fees (Note 2) 116 Miscellaneous 1,972 Fees waived or borne by Manager (Note 2) (105,410) ----------- 81,855 Shareholder service fee (Note 2) Class III 37,277 ----------- Net expenses 119,132 ----------- Net investment income 173,151 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 64,492 Closed futures contracts (46,078) ----------- Net realized gain 18,414 ----------- Change in net unrealized appreciation (depreciation) on: Investments (3,118,655) Open futures contracts (283,355) ----------- Net unrealized loss (3,402,010) ----------- Net realized and unrealized loss (3,383,596) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(3,210,445) ===========
16 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD FROM DECEMBER 31, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ----------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 173,151 Net realized gain 18,414 Change in net unrealized appreciation (depreciation) (3,402,010) ------------ Net decrease in net assets resulting from operations (3,210,445) ------------ Net share transactions: (Note 5) Class III 163,108,546 ------------ Increase in net assets resulting from net share transactions 163,108,546 ------------ Total increase in net assets 159,898,101 NET ASSETS: Beginning of period -- ------------ End of period (including accumulated undistributed net investment income of $173,151.) $159,898,101 ============
See accompanying notes to the financial statements. 17 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM DECEMBER 31, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ----------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 -------- Income from investment operations: Net investment income 0.01 Net realized and unrealized gain (loss) (0.19) -------- Total from investment operations (0.18) -------- NET ASSET VALUE, END OF PERIOD $ 9.82 ======== TOTAL RETURN(A) (1.80)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $159,898 Net expenses to average daily net assets 0.48%* Net investment income to average daily net assets 0.70%* Portfolio turnover rate 13% Average broker commission rate per equity share $ .0344 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.01
(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. * Annualized. 18 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 1.SIGNIFICANT ACCOUNTING POLICIES The GMO Small Cap Growth Fund (the "Fund"), which commenced operations on December 31, 1996, 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 into classes. The Fund seeks long-term growth of capital through investment primarily in companies whose equity capitalization ranks in the lower two-thirds of the 1,800 companies with the largest equity capitalization whose securities are listed on a United States national securities exchange. The Fund offers three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. At February 28, 1997, Class III was the only active class of shares of the Fund. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with generally accepted accounting principles 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 investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indicies. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a specified price 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 purchase of a futures contract, the Fund is required to deposit with its custodian, in a segregated 19 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- account in the name of the futures broker, an amount of cash or U.S. government 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 held as of February 28, 1997. 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. SECURITY LENDING The Fund may lend its securities to certain member firms of the New York Stock Exchange. 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 28, 1997, the Fund loaned securities having a market value of $13,902,969, collateralized by cash in the amount of $14,501,593, 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. 20 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income 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 in such manner as deemed equitable by the Trustees, 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 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 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 as paid-in capital by the Fund. For the period ended February 28, 1997, the Fund received $37,665 in purchase premiums and no 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 .50% of average daily net assets. The Fund has adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares, and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .33% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the period ended February 28, 1997 was $116. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 21 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 3.PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short- term investments, for the period ended February 28, 1997, aggregated $31,064,708 and $18,876,410, respectively. 4.PRINCIPAL SHAREHOLDERS At February 28, 1997, 42% 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 December 31, 1996 (commencement of operations) to February 28, 1997 Class III: ----------------------------- Shares Amount ----------------------------- Shares sold 16,278,745 $ 163,108,546 Shares issued to shareholders in reinvestment of distributions -- -- Shares repurchased -- -- ------------- --------------- Net increase (decrease) 16,278,745 $ 163,108,546 ============= ===============
6.FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 1997 is as follows: LONG FUTURES CONTRACTS
Number of Expiration Net Unrealized Contracts Type Date Contract Value Depreciation --------- ------------ ---------- -------------- -------------- 70 Russell 2000 March 1997 $12,593,000 $(283,355)
At February 28, 1997, the Fund had sufficient cash and/or securities to cover any commitments or margin on open future contracts. 22 GMO CORE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 1997 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO 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 Core Fund at February 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 10, 1997 GMO CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------- COMMON STOCKS -- 95.8% AEROSPACE -- 0.8% 297,400 Raytheon Co 14,014,975 208,400 TRW Inc 10,914,950 -------------- 24,929,925 -------------- AUTOMOTIVE -- 3.2% 9,800 Bandag Inc 477,750 734,800 Chrysler Corp 24,891,349 983,700 Ford Motor Co 32,339,137 552,500 General Motors Corp 31,975,937 89,000 Goodyear Tire & Rubber Co 4,694,750 189,600 Harley Davidson Inc 7,086,300 -------------- 101,465,223 -------------- BANKING AND FINANCIAL SERVICES -- 12.6% 308,400 Ahmanson (HF) & Co 12,682,950 28,000 American General Corp 1,214,500 99,300 Amsouth Bancorp 5,089,125 384,500 Bank of Boston Corp 28,981,687 385,900 Bank of New York Inc 14,953,625 164,600 Bankers Trust New York Corp 14,937,450 345,600 Barnett Banks Inc 15,984,000 266,157 Bear Stearns Inc 7,984,715 75,000 Beneficial Corp 5,184,375 631,808 Chase Manhattan Corp 63,259,775 88,300 Citicorp 10,309,025 41,100 Comdisco Inc 1,279,238 110,000 Countrywide Credit Industry Inc 3,203,750 494,842 Dean Witter Discover & Co 18,989,562 2,100 Donaldson Lufkin & Jenrette 90,300 41,800 Edwards (AG) Inc 1,483,900 40,500 First Chicago NBD Corp 2,369,250 184,400 Fleet Financial Group Inc 11,248,400 67,900 Golden West Financial Corp 4,600,225 399,400 Great Western Financial Corp 17,523,675 64,000 Greenpoint Financial Corp 3,840,000 55,900 Household International Inc 5,415,313 106,600 Lehman Brothers Holding Inc 3,584,425 189,500 Mellon Bank Corp 15,231,063 127,100 Merrill Lynch 12,201,600
See accompanying notes to the financial statements. 1 GMO CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------- BANKING AND FINANCIAL SERVICES -- CONTINUED 82,300 Morgan Stanley Group Inc 5,195,188 40,400 Paine Webber Group Inc 1,318,050 662,600 PNC Bank Corp 28,077,674 294,200 Salomon Inc 16,364,875 96,000 Southern National Corp 3,732,000 99,300 Student Loan Marketing Association 10,513,388 131,800 Summit Bancorp 6,293,450 58,400 Sunamerica Inc 2,679,100 86,600 Synovus Financial Corp 3,020,175 475,043 Travelers Group Inc 25,474,180 167,700 US Bancorp 8,280,188 -------------- 392,590,196 -------------- CHEMICALS -- 1.0% 77,900 Eastman Chemical Co 4,294,238 3,500 Great Lakes Chemical Corp 162,313 356,700 Monsanto Co 12,974,963 27,100 Praxair Inc 1,317,738 241,400 Union Carbide Corp 11,406,150 -------------- 30,155,402 -------------- COMPUTER AND OFFICE EQUIPMENT -- 2.2% 505,800 Compaq Computer Corp * 40,084,649 335,850 Computer Associates International Inc 14,609,475 55,500 HBO & Co 3,198,188 1 NCR Corp 17 72,100 Pitney Bowes Inc 4,479,213 48,000 Reynolds & Reynolds Inc, Class A 1,344,000 77,600 Sterling Software Inc 2,221,300 45,300 Western Digital Corp 2,672,700 -------------- 68,609,542 -------------- CONSTRUCTION -- 0.3% 148,800 Home Depot Inc 8,109,600 -------------- CONSUMER GOODS -- 3.6% 340,400 Callaway Golf Co 10,850,250 122,900 Clorox Co 14,686,550 253,400 CVS Corp 11,719,750
2 See accompanying notes to the financial statements. GMO CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------ CONSUMER GOODS -- CONTINUED 36,400 Hasbro Inc 1,556,100 144,400 Liz Claiborne Inc 5,848,200 62,100 Newell Co 2,305,463 142,700 Nike Inc, Class B 10,256,563 302,800 Procter and Gamble Co 36,373,849 174,000 Reebok International Ltd 8,134,500 132,300 VF Corp 9,194,850 -------------- 110,926,075 -------------- ELECTRONIC EQUIPMENT -- 0.6% 37,000 3 Com Corp * 1,225,044 55,000 Cooper Industries Inc 2,433,750 5,100 Hubbell Inc, Class B 216,113 43,000 Litton Industries * 1,849,000 15,300 Northern Telecom Ltd 1,099,688 35,400 Raychem Corp 3,013,425 217,900 Tellabs Inc 8,688,763 -------------- 18,525,783 -------------- ENVIRONMENTAL CONTROL -- 0.1% 207,700 Wheelabrator Technology Inc 2,959,725 -------------- FOOD AND BEVERAGE -- 8.9% 955,900 Anheuser Busch Cos Inc 42,537,549 1,088,895 Archer Daniels Midland Co 20,144,558 1,358,800 Coca Cola Co 82,886,799 146,500 Coca Cola Enterprises Inc 9,046,375 417,900 CPC International Inc 35,155,837 43,950 Dean Foods Co 1,433,869 52,800 Hormel (Geo A) and Co 1,386,000 196,400 IBP Inc 4,566,300 319,200 Pepsico Inc 10,493,700 43,700 RJR Nabisco Holdings Corp 1,600,513 711,300 Sara Lee Corp 27,562,874 146,600 Seagrams Co Ltd 5,717,400 158,300 Unilever NV ADR 30,156,149 13,800 Universal Foods Corp 476,100 192,200 Whitman Corp 4,516,700 19,800 Wrigley (William Jr) Co 1,185,525 -------------- 278,866,248 -------------- HEALTH CARE -- 2.1% 20,900 Becton Dickinson & Co 1,029,325
See accompanying notes to the financial statements. 3 GMO CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------- HEALTH CARE -- CONTINUED 14,700 Cardinal Health Inc 904,050 31,000 Columbia HCA Healthcare Corp 1,302,000 59,000 Hillenbrand Industries Inc 2,219,875 235,600 Johnson & Johnson 13,576,450 4,700 McKesson Corp 311,375 517,300 Pharmacia & Upjohn Inc 19,075,438 664,050 Tenet Healthcare Corp * 18,012,356 182,300 United States Surgical Corp 7,770,538 33,200 Wellpoint Health Network 1,423,459 -------------- 65,624,866 -------------- INSURANCE -- 5.0% 95,800 Aetna Life and Casualty Co 7,939,425 97,550 AFLAC Corp 3,938,581 204,800 Allstate Corp 12,979,200 60,200 AMBAC Inc 4,018,350 35,700 Cigna Corp 5,457,638 20,700 CNA Financial Corp * 2,302,875 604,200 Conseco Inc 23,714,850 134,200 Lincoln National Corp 7,800,375 212,400 Loews Corp 21,691,350 84,000 MBIA Inc 8,200,500 97,800 Old Republic International Corp 2,652,825 58,900 Progressive Corp 3,894,763 26,700 Provident Cos Inc 1,455,150 171,300 Providian Corp 9,571,388 4,100 Reliastar Financial Corp 254,200 229,000 Safeco Corp 9,560,750 212,900 Saint Paul Cos Inc 14,370,750 96,750 Torchmark Corp 5,696,156 114,009 Transamerica Corp 9,990,039 9,400 USLIFE Corp 447,675 -------------- 155,936,840 -------------- MACHINERY -- 0.3% 131,400 Baker Hughes Inc 4,664,700 51,800 FMC Corp * 3,561,250 -------------- 8,225,950 --------------
4 See accompanying notes to the financial statements. GMO CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------ MANUFACTURING -- 4.5% 223,500 Corning Inc 8,409,188 625,100 General Electric Co 64,307,162 118,500 Gillette Co 9,376,313 213,300 IBM Corp 30,661,874 231,600 International Game Technology 4,053,000 91,500 Leggett & Platt Inc 3,282,563 1 Quest Diagnostics Inc 8 146,300 Temple Inland Inc 8,064,788 164,900 Tyco International Ltd 9,729,100 39,700 United Technologies Corp 2,987,425 -------------- 140,871,421 -------------- METALS AND MINING -- 0.3% 131,600 Allegheny Teledyne Inc 3,355,800 83,600 Phelps Dodge Corp 5,977,400 -------------- 9,333,200 -------------- OIL AND GAS -- 7.7% 215,500 Apache Corp 6,976,813 149,000 Atlantic Richfield Co 18,625,000 114,000 Burlington Resources Inc 5,001,750 189,800 Chevron Corp 12,242,100 202,200 Columbia Gas Systems Inc 11,879,250 67,700 Ensco International Inc * 2,936,488 251,500 Exxon Corp 25,118,562 2,000 FINA Inc, Class A 124,750 409,100 Global Marine Inc * 7,619,488 28,800 Mobil Corp 3,535,200 45,800 Noble Affiliates Inc 1,786,200 203,000 Noble Drilling Corp 3,603,250 20,200 Noram Energy Corp 303,000 153,000 Occidental Petroleum Corp 3,901,500 78,800 Oryx Energy Co * 1,576,000 68,200 Pennzoil Co 3,912,975 499,700 Phillips Petroleum Co 20,675,088 113,800 Royal Dutch Petroleum Co ADR 19,687,400 170,900 Schlumberger Ltd 17,196,813 357,800 Sonat Inc 16,458,800 367,500 Texaco Inc 36,336,562 536,700 Unocal Corp 20,730,038
See accompanying notes to the financial statements. 5 GMO CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------- OIL AND GAS -- CONTINUED 49,000 USX -- Marathon Group 1,304,625 -------------- 241,531,652 -------------- PAPER AND ALLIED PRODUCTS -- 0.9% 69,300 Champion International Corp 3,057,863 306,200 International Paper Co 12,783,850 95,300 Mead Corp 5,551,225 86,500 Sonoco Products Co 2,270,625 188,600 Westvaco Corp 5,563,700 1,000 Willamette Industries Inc 64,000 -------------- 29,291,263 -------------- PHARMACEUTICALS -- 10.0% 1,303,800 Abbott Laboratories 73,338,749 18,300 Allergan Inc 622,200 476,140 American Home Products Corp 30,472,959 644,600 Bristol Myers Squibb Co 84,120,299 172,500 Lilly (Eli) & Co 15,072,188 460,600 Merck & Co Inc 42,375,199 164,000 Pfizer Inc 15,026,500 188,000 Schering Plough Corp 14,405,500 437,900 Warner Lambert Co 36,783,599 -------------- 312,217,193 -------------- PRIMARY MATERIALS -- 0.0% 8,200 Vulcan Materials Co 530,950 -------------- PRIMARY PROCESSING -- 0.1% 132,200 USX -- US Steel Group Inc 4,147,775 -------------- REFINING -- 0.2% 24,000 Murphy Oil Corp 1,113,000 131,600 Tosco Corp 3,668,350 -------------- 4,781,350 -------------- RETAIL TRADE -- 5.2% 551,100 Albertsons Inc 19,426,275 304,800 American Stores Co 13,639,800 581,000 Dayton Hudson Corp 24,402,000 309,200 Dillard Department Stores Inc 9,314,650 168,200 Fruit of the Loom Inc * 6,875,175
6 See accompanying notes to the financial statements. GMO CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------- RETAIL TRADE -- CONTINUED 295,900 Gap Inc 9,764,700 1,188,200 Kmart Corp * 14,852,500 130,300 May Department Stores Co 6,075,238 250,900 Penney (JC) Co Inc 12,356,825 263,100 Safeway Inc * 12,661,688 101,200 TJX Cos Inc 4,225,100 590,300 Toys R Us Inc * 15,347,800 556,400 Wal Mart Stores Inc 14,675,050 -------------- 163,616,801 -------------- SERVICES -- 0.3% 16,300 BHC Communications Inc, Class A 1,662,600 11,000 Circus Circus Enterprises Inc * 343,750 28,400 Equifax Inc 844,900 4,500 Fleming Cos Inc 78,750 16,900 Robert Half International Inc 703,463 138,300 Supervalu Inc 4,287,300 -------------- 7,920,763 -------------- TECHNOLOGY -- 9.0% 131,200 Advanced Micro Devices Inc * 4,706,800 106,000 Avnet Inc 6,625,000 66,600 Cabletron Systems Inc 1,998,000 400,500 Cisco Systems Inc * 22,277,813 299,700 Dell Computer Corp 21,316,163 34,200 Grainger (WW) Inc 2,710,350 640,300 Intel Corp 90,842,562 824,200 Microsoft Corp 80,359,499 309,500 Oracle Corp 12,147,875 11,300 Seagate Technology Corp 533,925 411,300 Storage Technology Corp * 17,171,775 333,100 Xerox Corp 20,818,750 -------------- 281,508,512 -------------- TELECOMMUNICATIONS -- 5.5% 1,158,900 AT & T Corp 46,211,137 113,900 Bell Atlantic Corp 7,873,338 18,600 Bellsouth Corp 871,875 37,000 Cincinnati Bell Inc 2,294,000 265,600 GTE Corp 12,416,800
See accompanying notes to the financial statements. 7 GMO CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------- TELECOMMUNICATIONS -- CONTINUED 328,300 MCI Communications Corp 11,736,725 248,700 NYNEX Corp 12,808,050 829,100 Pacific Telesis Group 33,785,824 873,600 Sprint Corp 39,748,799 143,500 US West Inc 5,166,000 -------------- 172,912,548 -------------- TOBACCO -- 1.1% 253,000 Philip Morris Cos Inc 34,186,624 -------------- TRANSPORTATION -- 1.6% 449,100 Burlington Northern Santa Fe Railroad Co 37,387,574 163,900 CSX Corp 7,559,888 207,100 Ryder System Inc 6,523,650 -------------- 51,471,112 -------------- UTILITIES -- 8.7% 109,100 AES Corp * 7,132,413 213,400 Allegheny Power System Inc 6,535,375 334,900 American Electric Power Inc 13,982,075 298,500 Baltimore Gas and Electric Co 8,208,750 157,000 Carolina Power and Light Co 5,828,625 519,200 Central & South West Corp 12,655,500 434,000 Cinergy Corp 14,973,000 66,600 Citizens Utilities, Class B 790,875 195,600 CMS Energy Corp 6,405,900 144,400 Coastal Corp 6,570,200 61,700 Dominion Resources Inc 2,483,425 215,200 DPL Inc 5,299,300 166,200 DQE Inc 4,923,675 346,300 Duke Power Co 15,323,775 809,300 Edison International 17,399,950 133,800 Enova Corp 2,993,775 800,100 Entergy Corp 21,102,638 504,600 Houston Industries Inc 11,731,950 224,000 Illinova Corp 5,600,000 102,000 LG&E Energy Corp 2,524,500 253,400 Long Island Lighting Co 5,828,200 177,000 New York State Electric and Gas Corp 4,115,250 80,400 Northern States Power Co 3,829,050 444,500 Pacificorp 9,167,813
8 See accompanying notes to the financial statements. GMO CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- UTILITIES -- CONTINUED 140,000 Portland General Electric Co 5,477,500 155,900 Potomac Electric Power Co 3,955,963 107,500 PP & L Resources Inc 2,459,063 79,900 Public Service of Colorado 3,116,100 112,100 Scana Corp 2,928,613 1,571,800 Southern Co 34,186,649 147,600 Teco Energy Inc 3,597,750 391,300 Texas Utilities Co 15,798,738 245,700 Wisconsin Energy Corp 6,296,063 -------------- 273,222,453 -------------- TOTAL COMMON STOCKS (COST $2,585,240,194) 2,994,468,992 -------------- SHORT-TERM INVESTMENTS -- 8.0% CASH EQUIVALENTS -- 5.2%(B) $43,791,203 Bank of Boston Eurodollar Time Deposit, 5.5375% due 3/3/97 43,791,203 81,518,797 Merrimac Cash Fund Premium Class 81,518,797 $38,500,000 Prudential Securities Group Inc Master Note, 5.60% due 3/3/97 38,500,000 -------------- 163,810,000 -------------- U.S. GOVERNMENT -- 0.3% $ 8,500,000 U.S. Treasury Bill, 5.22% due 5/29/97(a) 8,395,841 -------------- REPURCHASE AGREEMENT -- 2.5% $77,434,694 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $77,465,991 and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $79,067,242. 77,434,694 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $249,636,404) 249,640,535 --------------
See accompanying notes to the financial statements. 9 GMO CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
VALUE ($) - ---------------------------------------------------------------------------- TOTAL INVESTMENTS -- 103.8% (Cost $2,834,876,598) ** 3,244,109,527 Other Assets and Liabilities (net) -- (3.8)% (118,897,912) -------------- TOTAL NET ASSETS -- 100% $3,125,211,615 ============== NOTES TO THE SCHEDULE OF INVESTMENTS: ADR -- American Depositary Receipt * Non-income producing security. (a) Security has been segregated to cover margin requirements on open financial futures contracts. (b) Represents investments of security lending collateral (Note 1). ** The aggregate identified cost for federal income tax purposes is $2,837,449,352, resulting in gross unrealized appreciation and depreciation of $437,437,721 and $30,777,546, respectively, and net unrealized appreciation of $406,660,175.
10 See accompanying notes to the financial statements. GMO CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $2,834,876,598) (Note 1) $3,244,109,527 Receivable for investments sold 81,903,947 Dividends and interest receivable 6,849,615 Receivable for expenses waived or borne by Manager (Note 2) 549,329 Receivable for Fund shares sold 76,650 -------------- Total assets 3,333,489,068 -------------- LIABILITIES: Payable for investments purchased 29,603,864 Payable upon return of securities loaned (Note 1) 163,810,000 Payable for Fund shares repurchased 6,822,493 Payable to affiliate for (Note 2): Management fee 1,277,604 Shareholder service fee 369,423 Accrued expenses 243,556 Payable for open swap contracts (Notes 1 and 6) 5,927,436 Payable for variation margin on open futures contracts (Notes 1 and 6) 223,077 -------------- Total liabilities 208,277,453 -------------- NET ASSETS $3,125,211,615 ============== NET ASSETS CONSIST OF: Paid-in-capital $2,143,345,946 Accumulated undistributed net investment income 5,378,592 Accumulated undistributed net realized gain 574,552,558 Net unrealized appreciation 401,934,519 -------------- $3,125,211,615 ============== NET ASSETS ATTRIBUTABLE TO: Class I shares $ 9,103,927 ============== Class II shares $ 64,763,264 ============== Class III shares $3,051,344,424 ============== SHARES OUTSTANDING: Class I 452,508 ============== Class II 3,221,403 ============== Class III 151,675,682 ============== NET ASSET VALUE PER SHARE: Class I $ 20.12 ============== Class II $ 20.10 ============== Class III $ 20.12 ==============
See accompanying notes to the financial statements. 11 GMO CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $297,453) $ 63,282,950 Interest (including securities lending income of $115,499) 8,583,128 ------------ Total income 71,866,078 ------------ EXPENSES: Management fee (Note 2) 16,712,773 Custodian and transfer agent fees 469,265 Legal fees 160,879 Audit fees 60,649 Trustees fees (Note 2) 15,848 Registration fees 3,608 Miscellaneous 26,824 Fees waived or borne by Manager (Note 2) (5,742,268) ------------ 11,707,578 Shareholder service fee (Note 2) Class I 12,632 Class II 62,244 Class III 3,523,024 ------------ Net expenses 15,305,478 ------------ Net investment income 56,560,600 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 863,014,379 Closed futures contracts 19,853,859 Closed swap contracts (25,706,067) ------------ Net realized gain 857,162,171 ------------ Change in net unrealized appreciation (depreciation) on: Investments (269,802,109) Open futures contracts (589,190) Open swap contracts (2,108,548) ------------ Net unrealized loss (272,499,847) ------------ Net realized and unrealized gain 584,662,324 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $641,222,924 ============
12 See accompanying notes to the financial statements. GMO CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, 1997 FEBRUARY 29, 1996 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 56,560,600 $ 64,146,217 Net realized gain 857,162,171 403,829,023 Change in net unrealized appreciation (depreciation) (272,499,847) 457,594,296 -------------- -------------- Net increase in net assets resulting from operations 641,222,924 925,569,536 -------------- -------------- Distributions to shareholders from: Net investment income Class I (60,981) -- Class II (622,038) -- Class III (60,383,941) (64,258,886) -------------- -------------- Total distributions from net investment income (61,066,960) (64,258,886) -------------- -------------- Net realized gains Class I (574,148) -- Class II (6,542,685) -- Class III (430,596,024) (221,987,205) -------------- -------------- Total distributions from net realized gains (437,712,857) (221,987,205) -------------- -------------- (498,779,817) (286,246,091) -------------- -------------- Net share transactions: (Note 5) Class I 8,598,090 -- Class II 65,659,589 -- Class III (270,803,491) 230,742,937 -------------- -------------- Increase (decrease) in net assets resulting from net share transactions (196,545,812) 230,742,937 -------------- -------------- Total increase (decrease) in net assets (54,102,705) 870,066,382 NET ASSETS: Beginning of period 3,179,314,320 2,309,247,938 -------------- -------------- End of period (including accumulated undistributed net investment income of $5,378,592 and $9,884,952, respectively) $3,125,211,615 $3,179,314,320 ============== ==============
See accompanying notes to the financial statements. 13 GMO CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS I SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JULY 2, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ---------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $18.97 ------ Income from investment operations: Net investment income 0.20 Net realized and unrealized gain 2.88 ------ Total from investment operations 3.08 ------ Less distributions to shareholders: From net investment income (0.19) From net realized gains (1.74) ------ Total distributions (1.93) ------ NET ASSET VALUE, END OF PERIOD $20.12 ====== TOTAL RETURN(A) 16.84% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $9,104 Net expenses to average daily net assets 0.61%* Net investment income to average daily net assets 1.55%* Portfolio turnover rate 107% Average broker commission rate per equity share $.0297 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.02
(a) Calculation excludes purchase premiums. The total return would have been lower had certain expenses not been waived during the period shown. *Annualized. 14 See accompanying notes to the financial statements. GMO CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS II SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JUNE 7, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ---------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 20.12 ------- Income from investment operations: Net investment income 0.25 Net realized and unrealized gain 2.92 ------- Total from investment operations 3.17 ------- Less distributions to shareholders: From net investment income (0.30) From net realized gains (2.89) ------- Total distributions (3.19) ------- NET ASSET VALUE, END OF PERIOD $ 20.10 ======= TOTAL RETURN(A) 17.46% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $64,763 Net expenses to average daily net assets 0.55%* Net investment income to average daily net assets 1.63%* Portfolio turnover rate 107% Average broker commission rate per equity share $ .0297 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.03
(a) Calculation excludes purchase premiums. The total return would have been lower had certain expenses not been waived during the period shown. * Annualized. See accompanying notes to the financial statements. 15 GMO CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ---------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 19.46 $ 15.45 $ 15.78 $ 15.73 $ 15.96 ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.36 0.41 0.41 0.42 0.45 Net realized and unrealized gain 3.58 5.49 0.66 1.59 1.13 ---------- ---------- ---------- ---------- ---------- Total from investment operations 3.94 5.90 1.07 2.01 1.58 ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.39) (0.42) (0.39) (0.43) (0.46) From net realized gains (2.89) (1.47) (1.01) (1.53) (1.35) ---------- ---------- ---------- ---------- ---------- Total distributions (3.28) (1.89) (1.40) (1.96) (1.81) ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 20.12 $ 19.46 $ 15.45 $ 15.78 $ 15.73 ========== ========== ========== ========== ========== TOTAL RETURN(A) 22.05% 39.08% 7.45% 13.36% 10.57% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $3,051,344 $3,179,314 $2,309,248 $1,942,005 $1,892,955 Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48% 0.49% Net investment income to average daily net assets 1.78% 2.25% 2.63% 2.56% 2.79% Portfolio turnover rate 107% 77% 99% 40% 54% Average broker commission rate per equity share(b) $ .0297 N/A N/A N/A N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.04 $ 0.01 $ 0.01 $ 0.01 $ 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) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. 16 See accompanying notes to the financial statements. GMO CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 1.SIGNIFICANT ACCOUNTING POLICIES The GMO 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 a total return greater than that of the Standard & Poor's 500 Stock Index through investment of substantially all of its assets in common stocks chosen from the Wilshire 5000 Index and primarily in common stocks chosen from among the 1,200 companies with the largest equity capitalization whose securities are listed on a United States national securities exchange. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II, and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with generally accepted accounting principles 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 investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indicies. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a specified price 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 purchase of a futures contract, the Fund is required to deposit with its custodian, in a segregated 17 GMO CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- account in the name of the futures broker, an amount of cash or U.S. government 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 held as of February 28, 1997. 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. SECURITY LENDING The Fund may lend its securities to certain member firms of the New York Stock Exchange. 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 28, 1997, the Fund loaned securities having a market value of $158,087,263, collateralized by cash in the amount of $163,810,000, 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 based on a notional amount. 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, 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 18 GMO CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there is 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 28, 1997. 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for redemptions in-kind. Gains associated with such in-kind transactions amounted to $26,353,758. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules from generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ----------------- ------------------------ --------------- -- $(25,005,025) $25,005,025
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. 19 GMO CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income 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 in such manner as deemed equitable by the Trustees, 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 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. Prior to June 1, 1996, the premium on cash purchases was .17% of the amount invested. All purchase premiums are paid to and recorded as paid-in capital by the Fund. For the year ended February 28, 1997, the Fund received $416,600 in purchase premiums. There is no premium for cash 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 .525% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares, and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .33% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .48%; thus, the net annual expense ratio after the waiver for a Class III shareholder is unchanged. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997 was $15,848. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 20 GMO CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 3.PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short- term investments and in-kind transactions, for the year ended February 28, 1997, aggregated $3,206,085,811 and $3,762,968,473, respectively. 4.PRINCIPAL SHAREHOLDERS At February 28, 1997, 97% of the outstanding Class I shares of the Fund were held by two shareholders and 100% of the outstanding Class II shares of the Fund were held by two shareholders, each holding in excess of 10% of the outstanding shares of the respective class. 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 2, 1996 (commencement of operations) to February 28, 1997 Class I: ----------------------------- Shares Amount ----------------------------- Shares sold 422,178 $ 8,023,942 Shares issued to shareholders in reinvest- ment of distributions 30,330 574,148 Shares repurchased -- -- ------------- --------------- Net increase 452,508 $ 8,598,090 ============= =============== Period from June 7, 1996 (commencement of operations) to February 28, 1997 Class II: ----------------------------- Shares Amount ----------------------------- Shares sold 2,843,284 $ 58,494,866 Shares issued to shareholders in reinvest- ment of distributions 378,119 7,164,723 Shares repurchased -- -- ------------- --------------- Net increase 3,221,403 $ 65,659,589 ============= ===============
21 GMO CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - --------------------------------------------------------------------------------
Year Ended Year Ended February 28, 1997 February 29, 1996 Class III: ---------------------------- -------------------------- Shares Amount Shares Amount ----------- --------------- ----------- ------------- Shares sold 15,209,862 $ 294,136,127 25,285,500 $ 453,992,902 Shares issued to shareholders in reinvestment of distributions 24,657,273 468,161,533 14,052,401 260,120,885 Shares repurchased (51,595,821) (1,033,101,151) (25,442,869) (483,370,850) ----------- --------------- ----------- ------------- Net increase (decrease) (11,728,686) $ (270,803,491) 13,895,032 $ 230,742,937 =========== =============== =========== =============
6.FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 1997 is as follows: LONG FUTURES CONTRACTS
Number of Expiration Net Unrealized Contracts Type Date Contract Value Depreciation --------- ------------ ---------- -------------- -------------- 27 Russell 2000 March 1997 $ 4,857,300 $ (27,595) 200 S&P 500 March 1997 79,040,000 (1,343,379) ----------- $(1,370,974) ===========
At February 28, 1997, the Fund has sufficient cash and/or securities to cover any commitments or margin on open futures contracts. SWAP AGREEMENTS
Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------- ---------- --------------------------------- -------------- $99,139,177/ 5/16/97 Agreement with Morgan Stanley $ 281,051 95,053,839 Capital Services, Inc. dated May 20, 1996 to pay (receive) the notional amount multiplied by the return on the Standard & Poor's 500 Index (including dividends) less the notional
22 GMO CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - --------------------------------------------------------------------------------
amount multiplied by 6 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 6 month LIBOR adjusted by a specified spread. $87,702,060/ 9/11/97 Agreement with Morgan Stanley $(4,990,423) 87,862,184 Capital Services, Inc. dated September 9, 1996 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 6 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 6 month LIBOR adjusted by a specified spread. 27,887,480/ 10/07/97 Agreement with Morgan Stanley (1,218,064) 25,734,919 Capital Services, Inc. dated December 30, 1996 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 6 month LIBOR adjusted by a specified spread and to receive (pay) the counterparty's notional amount multiplied by the return on the Russell 2000 Index (including dividends) less the notional amount multiplied by 6 month LIBOR adjusted by a specified spread. ----------- Net unrealized depreciation $(5,927,436) ===========
23 GMO CORE FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION -- (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 74.96% of distributions as net capital gain dividends. 24 GMO CORE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Core Fund returned 22.1% for the fiscal year ended February 28, 1997, as compared to 26.1% for the S&P 500. Consistent with the Fund's investment objective and policies, the Fund was invested substantially in common stocks throughout the period. The majority of the Fund's performance shortfall was due to three sector strategies which underperformed for the year. The first of these strategies involved underweighting banks and overweighting utilities, a bet which was based upon our view that utility stocks are significantly undervalued relative to their historical levels, and that banks, which are in the sixth year of a rally off their 1990 lows, are overvalued. Historically both sectors have underperformed in periods of rising interest rates and the bet was expected to have a neutral impact if rates did in fact increase. This year, however, banks moved up and utilities moved down relative to the market in an environment of rising interest rates. Therefore, rather than having the neutralizing effect that was intended, both bets hurt the performance of the Fund. The second sector strategy, overweighting defensive stocks and underweighting cyclical stocks, also impacted performance negatively, primarily during the rally of cyclical stocks in the early part of the year. Last, our underweight position in the largest 100 industrials hurt relative performance in an environment where the largest capitalization stocks carried the market, significantly outperforming smaller industrial stocks for the year. In addition to the aforementioned sector bets, the three GMO stock selection parameters -- value, momentum and neglect -- had mixed results for the year. Relative to the S&P 500, our dividend discount model provided positive contributions to return while the momentum and neglect models both experienced negative value-added versus the index. OUTLOOK The Fund's overweight in utility stocks, which is in companies with good fundamental prospects in the continuing deregulatory environment, remains unchanged. We are also overweight in small-cap stocks, which appear very attractive relative to their historical levels and to the valuations for large capitalization stocks. With large-cap value stocks approaching more attractive valuation levels following the rally of large-cap growth stocks, we have increased the weight of the value stream in the portfolio. The weight of the momentum and neglect streams have been reduced somewhat. 25 GMO CORE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- We believe that growth of the derivatives markets and increased participation of hedge funds has made stock and sector moves sharper and less predictable. As a result, we have enhanced our risk controls to accommodate a more volatile and difficult market environment. We are confident that with stricter risk parameters in place, the Core Fund's volatility will resume the well-controlled behavior that has been the cornerstone of our long-term performance. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management. They are not meant as investment advice. 26 Comparison of Change in Value of a $10,000 Investment in GMO Core Fund Class III shares and the S & P 500 Index As of February 28, 1997 Average Annual Total Return
Since Inception 1 Year 5 Year 09/18/85 Class III 21.9% 17.9% 17.7% 06/07/96 Class II n/a n/a 17.3% 07/02/96 Class I n/a n/a 16.6%
[Line Graph Appears Here]
Date GMO Core Fund S & P 500 Index 09/18/85 9,986 10,000 02/28/86 12,609 12,577 02/28/87 16,256 16,288 02/29/88 15,736 15,851 02/28/89 17,546 17,736 02/28/90 21,262 21,088 02/28/91 24,776 24,181 02/29/92 28,137 28,046 02/28/93 31,121 31,035 02/28/94 35,278 33,620 02/28/95 37,910 36,095 02/29/96 52,725 48,620 02/28/97 64,351 61,339
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. 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 paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Performance for Class I and Class II shares will be different due to higher shareholder fees. Past performance is not indicative of future performance. Information is unaudited. GMO GROWTH FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 1997 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 (formerly GMO Growth Allocation Fund) at February 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 10, 1997 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------ COMMON STOCKS -- 91.4% AEROSPACE -- 0.9% 5,700 Allied Signal Inc 411,825 24,600 Raytheon Co 1,159,275 5,700 Thiokol Corp 317,775 4,400 TRW Inc 230,450 ------------ 2,119,325 ------------ AUTOMOTIVE -- 0.6% 1,200 Bandag Inc 58,500 800 Breed Technologies Inc 17,500 1,000 Electronic Data Systems Corp 45,125 5,400 Genuine Parts Co 252,450 23,000 Harley Davidson Inc 859,625 3,600 Lear Corp 140,400 ------------ 1,373,600 ------------ BANKING AND FINANCIAL SERVICES -- 6.3% 1,100 Advanta Corp, Class A 45,513 6,900 Ahmanson (HF) & Co 283,763 2,100 Alex Brown Inc 122,063 3,300 Alliance Capital Management 92,400 1,700 Amsouth Bancorp 87,125 11,500 Bank of Boston Corp 866,813 3,800 Bank of New York Inc 147,250 3,000 Bankers Trust New York Corp 272,250 1,000 Banponce Corp 36,000 12,600 Barnett Banks Inc 582,750 9,096 Bear Stearns Inc 272,885 6,500 Beneficial Corp 449,313 12,500 Chase Manhattan Corp 1,251,563 8,901 Comdisco Inc 277,028 1,000 Credit Acceptance Corp * 21,250 55,800 Dean Witter Discover & Co 2,141,324 19,800 Dime Bancorp Inc * 346,500 10,800 Edwards (AG) Inc 383,400 1,100 Fleet Financial Group Inc 67,100 7,300 Franklin Resources Inc 427,050 1,100 Glendale Federal Savings Bank 29,288 300 Golden West Financial Corp 20,325 13,000 Great Western Financial Corp 570,375
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 28, 1997
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------- BANKING AND FINANCIAL SERVICES -- CONTINUED 3,400 Household International Inc 329,375 200 Huntington Bancshares Inc 5,700 2,500 John Nuveen and Co Inc, Class A 75,938 4,300 MGIC Investment Corp 338,088 2,000 Morgan Stanley Group Inc 126,250 22,500 PNC Bank Corp 953,438 9,200 Rowe (T) & Price Associates Inc 405,950 7,700 Student Loan Marketing Association 815,238 5,900 Sunamerica Inc 270,663 59,197 Travelers Group Inc 3,174,438 1,980 Washington Federal Inc 50,490 ------------ 15,338,896 ------------ CHEMICALS -- 1.4% 2,700 Cytec Industries Inc 106,988 36,300 Monsanto Co 1,320,412 24,900 Praxair Inc 1,210,763 4,400 Scherer (RP) Corp 254,100 7,200 Sherwin Williams Co 404,100 10,800 Wellman Inc 189,000 ------------ 3,485,363 ------------ COMPUTER AND OFFICE EQUIPMENT -- 5.5% 4,000 Apple Computer Inc * 65,000 48,000 Compaq Computer Corp * 3,803,999 58,400 Computer Associates International Inc 2,540,399 14,600 EMC Corp * 525,600 12,600 Gateway 2000 Inc 740,250 12,400 HBO & Co 714,550 37,900 Hewlett Packard Co 2,122,399 23,400 Iomega Corp 362,700 6,200 Lexmark International Group Inc 172,825 1 NCR Corp 8 12,100 Pitney Bowes Inc 751,713 12,400 Quantum Corp * 492,900 6,000 Rational Software Corp 155,250 3,300 Silicon Graphics Inc * 79,613 6,400 Verifone Inc 222,400 11,800 Western Digital Corp 696,200 ------------ 13,445,806 ------------
2 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------ CONSTRUCTION -- 0.3% 12,100 Home Depot Inc 659,450 ------------ CONSUMER GOODS -- 5.8% 3,500 Acclaim Entertainment Inc * 18,594 18,400 Avon Products Inc 1,071,800 1,700 Block Drug Co Inc, Class A 79,050 24,900 Callaway Golf Co 793,688 7,400 Clorox Co 884,300 1,600 Colgate-Palmolive Co 165,600 5,400 CVS Corp 249,750 4,300 Department 56 Inc 77,400 3,000 First Brands Corp 74,625 6,800 Hasbro Inc 290,700 2,400 Hon Industries Inc 91,800 5,800 Jones Apparel Group Inc 215,325 2,800 Kinetic Concepts Inc 41,650 9,300 Kohls Corp 427,800 7,100 Lancaster Colony Corp 324,825 14,800 Liz Claiborne Inc 599,400 2,500 Miller Herman Inc 164,375 14,500 Newell Co 538,313 37,200 Nike Inc, Class B 2,673,749 23,500 Procter and Gamble Co 2,822,937 19,400 Reebok International Ltd 906,950 4,300 Russell Corp 161,788 2,900 Sunbeam Corp 79,388 10,200 Technology Data Corp * 244,800 7,200 Terra Industries Inc 98,100 11,000 Unifi Inc 350,625 11,100 VF Corp 771,450 ------------ 14,218,782 ------------ ELECTRONIC EQUIPMENT -- 2.8% 15,300 3 Com Corp * 506,572 16,200 Adaptec Inc 616,613 23,000 ADC Telecommunications Inc 621,000 37,700 American Power Conversion Corp * 786,988 8,400 Andrew Corp 462,000 6,000 Aspect Telecommunications Corp 149,250 10,900 Atmel Corp * 407,388 3,400 Diebold Inc 142,800
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 28, 1997
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------- ELECTRONIC EQUIPMENT -- CONTINUED 1,000 Hubbell Inc, Class B 42,375 3,000 Lattice Semiconductor Corp * 143,250 4,000 Litton Industries * 172,000 3,900 Maxim Intergrated Products Inc * 193,538 1,700 Motorola Inc 94,988 6,600 Octel Communications Corp 120,450 8,200 Perkin Elmer Corp 582,200 3,300 Picturetel Corp * 51,975 12,000 Read Rite Corp 368,250 800 SCI Systems Inc * 42,800 700 Symbol Technologies Inc 35,175 28,500 Tellabs Inc 1,136,438 1,100 U.S. Robotics Corp 61,394 1,300 Vicor Corp * 21,288 ------------ 6,758,732 ------------ ENVIRONMENTAL CONTROL -- 0.1% 19,500 Wheelabrator Technology Inc 277,875 ------------ FOOD AND BEVERAGE -- 10.0% 78,700 Anheuser Busch Cos Inc 3,502,149 80,615 Archer Daniels Midland Co 1,491,377 217,500 Coca Cola Co 13,267,499 18,400 Coca Cola Enterprises Inc 1,136,200 17,100 CPC International Inc 1,438,537 14,300 Darden Restaurants Inc 103,675 6,300 Flowers Industries Inc 145,688 7,700 IBP Inc 179,025 25,600 Pepsico Inc 841,600 19,700 RJR Nabisco Holdings Corp 721,513 8,900 Sara Lee Corp 344,875 4,100 Smith Food and Drug Center, Class B 134,788 1,500 Unilever ADR 285,750 32,300 Whitman Corp 759,050 1,900 Wrigley (William Jr) Co 113,763 ------------ 24,465,489 ------------ HEALTH CARE -- 4.9% 8,000 Bard (CR) 219,000 3,300 Beckman Instruments Inc 136,950 5,300 Becton Dickinson & Co 261,025
4 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------- HEALTH CARE -- CONTINUED 1,700 Bergen Brunswig Corp, Class A 54,613 17,600 BioMet Inc 268,400 21,350 Cardinal Health Inc 1,313,025 11,000 Centocor Inc* 416,625 66,600 Columbia HCA Healthcare Corp 2,797,199 2,000 Forest Laboratories Inc * 76,250 1,400 Foundation Health Corp * 52,850 5,500 Guidant Corp 368,500 10,500 Health Management Associates Inc 278,250 4,600 Hillenbrand Industries Inc 173,075 7,500 Johnson & Johnson 432,188 3,300 KLA Instruments Corp * 137,569 4,100 Laboratory Corporation America Holdings 15,375 11,300 Lincare Holdings Inc* 487,313 3,600 Mallinckrodt Inc 153,000 2,900 Marquette Medical Systems, Class A 55,100 7,600 Mckesson Corp 503,500 8,400 Nellcor Puritan Bennet Inc 145,950 11,200 Novacare Corp * 140,000 7,500 Perrigo Co* 90,938 6,800 Rhone Poulenc Rorer Inc 482,800 4,300 Tencor Instruments * 172,269 58,995 Tenet Healthcare Corp * 1,600,238 2,000 Teradyne, Inc * 54,500 21,900 United States Surgical Corp 933,488 4,400 Wellpoint Health Network 188,650 ------------ 12,008,640 ------------ INSURANCE -- 3.9% 19,500 AFLAC Corp 787,313 4,000 AMBAC Inc 267,000 5,100 American Bankers Insurance Group 281,138 600 American International Group Inc 72,600 2,200 American National Insurance Co 181,500 1,400 Argonaut Group Inc 40,250 1,400 Chubb Corp 82,075 32,600 Conseco Inc 1,279,550 1,500 Health Systems International Inc, Class A 44,063 1,000 Home Beneficial Corp, Class B 38,000 4,000 Horace Mann Educators Corp 171,500 14,900 Loews Corp 1,521,662
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 28, 1997
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------- INSURANCE -- CONTINUED 6,600 MBIA Inc 644,325 400 Mercury General Corp 24,550 600 Ohio Casualty Corp 23,775 8,100 Old Republic International Corp 219,713 5,900 Oxford Health Plans Inc 328,925 1 Pacificare Health Systems, Class A * 64 2,596 Pacificare Health Systems, Class B 217,415 4,500 Progressive Corp 297,563 1,600 Protective Life Corp 68,800 10,200 Providian Corp 569,925 3,500 Reliastar Financial Corp 217,000 19,100 Saint Paul Cos Inc 1,289,250 7,200 Torchmark Corp 423,900 3,100 Transatlantic Holdings Inc 261,563 5,800 USLIFE Corp 276,225 ------------ 9,629,644 ------------ MACHINERY -- 0.6% 5,600 Baker Hughes Inc 198,800 200 Case Corp 10,375 1,400 Lam Research Corp * 53,375 1,100 Nordson Corp 61,600 5,400 Novellus System Inc * 441,450 18,300 Oakley Inc 162,413 2,600 Smith International Inc * 105,625 1,300 Tecumseh Products Co, Class B 71,825 13,300 US Filter Corp 465,500 ------------ 1,570,963 ------------ MANUFACTURING -- 3.2% 4,200 American Greetings Corp 130,200 4,000 Corning Inc 150,500 1,500 General Electric Co 154,313 59,546 Gillette Co 4,711,576 25,000 International Game Technology 437,500 10,900 Leggett & Platt Inc 391,038 600 Sequa Corp, Class A * 23,550 9,300 Trinity Industries Inc 299,925 25,400 Tyco International Ltd 1,498,599 ------------ 7,797,201 ------------
6 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------ OIL AND GAS -- 3.8% 11,900 Apache Corp 385,263 3,800 Atlantic Richfield Co 475,000 800 Barrett Resources Corp * 26,300 3,100 BJ Services Co 123,225 4,800 Burlington Resources Inc 210,600 13,900 Columbia Gas Systems Inc 816,625 7,900 El Paso Natural Gas Co 423,638 900 Energy Ventures Inc * 45,900 5,700 Enron Corp 227,288 400 Ensco International Inc * 17,350 6,500 Enserch Corp 136,500 100 FINA Inc, Class A 6,238 19,200 Global Marine Inc * 357,600 800 Louisiana Conservation Land & Exploration Co 38,200 2,700 National Fuel Natural Gas Co 116,100 900 Noble Affiliates Inc 35,100 8,400 Noble Drilling Corp 149,100 29,200 Noram Energy Corp 438,000 7,100 Panenergy Corp 302,638 4,500 Parker & Parsley Petroleum Co 132,750 2,300 Pennzoil Co 131,963 1,300 Peoples Energy Corp 44,038 15,600 Phillips Petroleum Co 645,450 17,800 Santa Fe Energy Resources Inc * 229,175 5,700 Schlumberger Ltd 573,563 18,200 Sonat Inc 837,200 10,300 Texaco Inc 1,018,413 3,100 Union Texas Petroleum Holdings Inc 57,350 34,300 Unocal Corp 1,324,837 ------------ 9,325,404 ------------ PAPER AND ALLIED PRODUCTS -- 0.1% 7,600 Sonoco Products Co 199,500 500 Willamette Industries Inc 32,000 ------------ 231,500 ------------ PHARMACEUTICALS -- 8.2% 114,504 Abbott Laboratories 6,440,849 7,400 Allergan Inc 251,600 6,700 Biogen, Inc 329,975 1,700 Bristol Myers Squibb Co 221,850
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 28, 1997
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------- PHARMACEUTICALS -- CONTINUED 13,000 Dura Pharmaceuticals Inc 437,125 5,100 Mark IV Industries Inc 118,575 30,500 Merck & Co Inc 2,805,999 50,656 Pfizer Inc 4,641,355 18,200 Schering Plough Corp 1,394,574 41,200 Warner Lambert Co 3,460,799 ------------ 20,102,701 ------------ PRIMARY MATERIALS -- 0.2% 11,500 Premark International Inc 271,688 2,400 Tupperware Corp 107,400 3,300 Vulcan Materials Co 213,675 ------------ 592,763 ------------ PRINTING AND PUBLISHING -- 0.1% 1,800 Central Newspapers, Class A 82,800 1,000 Tribune Co 39,250 300 Washington Post Co Class B 103,950 ------------ 226,000 ------------ REAL ESTATE -- 0.0% 2,900 Lennar Corp 73,225 ------------ REFINING -- 0.4% 28,800 Tosco Corp 802,800 1,700 Valero Energy Corp 53,550 ------------ 856,350 ------------ RETAIL TRADE -- 7.0% 39,200 Albertsons Inc 1,381,799 30,000 American Stores Co 1,342,499 23,100 Autozone Inc * 571,725 10,100 Bed, Bath & Beyond Inc 262,600 1,100 Blair Corp 19,938 5,200 Brinker International Inc * 61,750 1,800 Circuit City Stores Inc 56,250 10,000 Claire's Stores Inc 141,250 10,300 CompUSA Inc 206,000 8,950 Consolidated Stores Corp 314,369 11,600 Dayton Hudson Corp 487,200 11,175 DG Corp 317,091 21,400 Dillard Department Stores Inc 644,675
8 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------- RETAIL TRADE -- CONTINUED 26,800 Food Products Lion Inc 222,775 14,800 Fruit of the Loom Inc 604,950 51,300 Gap Inc 1,692,899 3,800 Hannaford Brothers Co 135,375 2,000 Kroger Co * 106,000 10,300 Limited Inc 195,700 800 Macfrugals Bargains Close Outs Inc * 21,700 5,600 May Department Stores Co 261,100 1,700 Meyer Fred Inc * 67,363 3,300 Pep Boys, Manny, Moe & Jack 107,663 900 Ross Stores Inc 43,200 26,600 Safeway Inc * 1,280,125 1,200 Stanhome Inc 30,450 14,100 Starbucks Corp * 474,113 4,700 Tandy Corp 236,763 3,400 The Vons Co Inc * 231,625 1,400 TJX Cos Inc 58,450 48,800 Toys R Us Inc * 1,268,800 1,800 Value City Department Stores Inc * 14,625 162,400 Wal Mart Stores Inc 4,283,299 ------------ 17,144,121 ------------ SERVICES -- 1.3% 600 Belo (AH) Corp 22,650 900 BHC Communications Inc, Class A 91,800 3,800 Catalina Marketing Corp 190,950 5,300 Cintas Corp 286,200 7,000 Circus Circus Enterprises Inc * 218,750 4,100 Disney Walt Co 304,425 16,200 Equifax Inc 481,950 3,900 Fleming Cos Inc 68,250 1,600 Gannett Co Inc 127,600 300 Kingworld Productions Inc * 11,138 8,700 Robert Half International Inc 362,138 3,100 Servicemaster Industry Inc 79,825 14,600 Supervalu Inc 452,600 1,600 Total System Services Inc 49,200 10,000 USA Waste Services Inc 360,000 ------------ 3,107,476 ------------
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 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------- TECHNOLOGY -- 15.4% 16,200 Acxiom Corp 247,050 19,500 Advanced Micro Devices Inc * 699,563 1,700 American Management Systems Inc * 29,750 11,200 Avnet Inc 700,000 40,900 BMC Software Inc 1,751,030 5,200 Cabletron Systems Inc 156,000 65,600 Cisco Systems Inc * 3,648,999 7,200 Compuware Corp 448,200 33,100 Dell Computer Corp 2,354,237 2,200 Electronics For Imaging Inc 84,700 4,600 Fiserv Inc* 150,650 7,100 Grainger (WW) Inc 562,675 86,000 Intel Corp 12,201,249 3,400 Keane Inc 119,850 91,900 Microsoft Corp 8,960,249 3,300 National Data Corp 115,913 53,700 Oracle Corp 2,107,724 21,200 Paychex Inc 922,200 9,600 Seagate Technology Corp 453,600 900 Shared Medical Systems Corp 49,163 1,300 Solectron Corp * 68,738 31,300 Storage Technology Corp * 1,306,775 5,800 Sungard Data Systems Inc * 294,350 3,000 Synopsys Inc * 107,063 ------------ 37,539,728 ------------ TELECOMMUNICATIONS -- 4.3% 100,400 AT & T Corp 4,003,449 1,500 Cincinnati Bell Inc 93,000 5,500 Comsat Corp 144,375 25,400 MCI Communications Corp 908,050 4,100 NYNEX Corp 211,150 45,000 Pacific Telesis Group 1,833,749 4,600 Southern New England Telecom 166,750 66,700 Sprint Corp 3,034,849 ------------ 10,395,372 ------------ TOBACCO -- 2.6% 47,128 Philip Morris Cos Inc 6,368,170 ------------
10 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- TRANSPORTATION -- 1.3% 20,900 Burlington Northern Santa Fe Railroad Co 1,739,924 21,800 CSX Corp 1,005,525 700 Federal Express Corp 36,050 1,300 Gatx Corp 63,700 8,900 Ryder System Inc 280,350 ------------ 3,125,549 ------------ UTILITIES -- 0.4% 400 Brooklyn Union Gas Co 11,400 9,550 Citizens Utilities, Class B 113,411 8,300 Coastal Corp 377,650 6,000 MCN Corp 181,500 4,000 Natural Gas Clearinghouse 79,000 4,100 Nicor Inc 137,350 700 Pacific Enterprises 21,350 900 Washington Gas Light Co 19,913 ------------ 941,574 ------------ TOTAL COMMON STOCKS (COST $195,566,218) 223,179,699 ------------ SHORT-TERM INVESTMENTS -- 6.6% CASH EQUIVALENTS -- 4.4%(B) 1,179,281 American AAdvantage Money Market Fund 1,179,281 $3,445,352 Bank of Boston Eurodollar Time Deposit, 5.5375% due 3/3/97 3,445,352 1,731,367 Merrimac Cash Fund Premium Class 1,731,367 $4,500,000 Prudential Securities Group Inc Master Note, 5.60% due 3/3/97 4,500,000 ------------ 10,856,000 ------------ U.S. GOVERNMENT -- 0.0% $ 50,000 U.S. Treasury Bill, 5.22% due 5/29/97(a) 49,387 ------------ REPURCHASE AGREEMENT -- 2.2% $5,257,225 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $5,259,350 and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $5,368,062. 5,257,225 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $16,162,588) 16,162,612 ------------
See accompanying notes to the financial statements. 11 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
VALUE ($) - ------------------------------------------------------------------------ TOTAL INVESTMENTS -- 98.0% (Cost $211,728,806) ** 239,342,311 Other Assets and Liabilities (net) -- 2.0% 4,841,121 ------------- TOTAL NET ASSETS -- 100% $ 244,183,432 ============= NOTES TO THE SCHEDULE OF INVESTMENTS: ADR -- American Depositary Receipt * Non-income producing security. (a) Security has been segregated to cover margin requirements on open financial futures contracts. (b) Represents investments of security lending collateral (Note 1). ** The aggregate identified cost for federal income tax purposes is $212,154,521, resulting in gross unrealized appreciation and depreciation of $31,780,512 and $4,592,722, respectively, and net unrealized appreciation of $27,187,790.
12 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $211,728,806) (Note 1) $239,342,311 Receivable for investments sold 24,660,124 Dividends and interest receivable 232,919 Receivable for expenses waived or borne by Manager (Note 2) 43,678 ------------ Total assets 264,279,032 ------------ LIABILITIES: Payable for investments purchased 2,754,333 Payable upon return of securities loaned (Note 1) 10,856,000 Payable for Fund shares repurchased 4,588,000 Payable to affiliate for (Note 2): Management fee 98,257 Shareholder service fee 29,477 Accrued expenses 54,046 Payable for open swap contracts (Notes 1 and 6) 1,649,521 Payable for variation margin on open futures contracts (Notes 1 and 6) 65,966 ------------ Total liabilities 20,095,600 ------------ NET ASSETS $244,183,432 ============ NET ASSETS CONSIST OF: Paid-in-capital $165,406,143 Accumulated undistributed net investment income 668,129 Accumulated undistributed net realized gain 52,453,021 Net unrealized appreciation 25,656,139 ------------ $244,183,432 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $244,183,432 ============ SHARES OUTSTANDING: Class III 47,135,740 ============ NET ASSET VALUE PER SHARE: Class III $ 5.18 ============
See accompanying notes to the financial statements. 13 GMO GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $9,768) $ 4,553,136 Interest (including securities lending income of $19,206) 983,575 ----------- Total income 5,536,711 ----------- EXPENSES: Management fee (Note 2) 1,637,804 Custodian and transfer agent fees 78,029 Audit fees 47,841 Legal fees 17,049 Trustees fees (Note 2) 1,742 Registration fees 442 Miscellaneous 3,421 Fees waived or borne by Manager (Note 2) (561,765) ----------- 1,224,563 Shareholder service fee (Note 2) Class III 347,907 ----------- Net expenses 1,572,470 ----------- Net investment income 3,964,241 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 107,638,369 Closed futures contracts 3,719,834 Closed swap contracts (2,423,559) ----------- Net realized gain 108,934,644 ----------- Change in net unrealized appreciation (depreciation) on: Investments (49,148,219) Open futures contracts (168,269) Open swap contracts (1,163,427) ----------- Net unrealized loss (50,479,915) ----------- Net realized and unrealized gain 58,454,729 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $62,418,970 ===========
14 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, 1997 FEBRUARY 29, 1996 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 3,964,241 $ 5,177,101 Net realized gain 108,934,644 39,524,050 Change in net unrealized appreciation (de- preciation) (50,479,915) 61,683,361 ------------ ------------ Net increase in net assets resulting from operations 62,418,970 106,384,512 ------------ ------------ Distributions to shareholders from: Net investment income Class III (4,363,604) (4,668,104) ------------ ------------ Net realized gains Class III (77,849,380) (23,225,614) ------------ ------------ (82,212,984) (27,893,718) ------------ ------------ Net share transactions: (Note 5) Class III (127,388,467) 73,868,802 ------------ ------------ Increase (decrease) in net assets result- ing from net share transactions (127,388,467) 73,868,802 ------------ ------------ Total increase (decrease) in net assets (147,182,481) 152,359,596 NET ASSETS: Beginning of period 391,365,913 239,006,317 ------------ ------------ End of period (including accumulated un- distributed net investment income of $668,129 and $1,067,492, respectively) $244,183,432 $391,365,913 ============ ============
See accompanying notes to the financial statements. 15 GMO GROWTH FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 5.65 $ 4.45 $ 4.14 $ 4.55 $ 5.82 -------- -------- -------- -------- -------- Income from investment opera- tions: Net investment income 0.07 0.08 0.06 0.06 0.07 Net realized and unrealized gain 1.03 1.54 0.38 0.11 0.17 -------- -------- -------- -------- -------- Total from investment opera- tions 1.10 1.62 0.44 0.17 0.24 -------- -------- -------- -------- -------- Less distributions to share- holders: From net investment income (0.08) (0.07) (0.06) (0.06) (0.08) From net realized gains (1.49) (0.35) (0.07) (0.52) (1.43) -------- -------- -------- -------- -------- Total distributions (1.57) (0.42) (0.13) (0.58) (1.51) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PE- RIOD $ 5.18 $ 5.65 $ 4.45 $ 4.14 $ 4.55 ======== ======== ======== ======== ======== TOTAL RETURN(A) 21.64% 37.77% 10.86% 4.13% 3.71% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $244,183 $391,366 $239,006 $230,698 $168,143 Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48% 0.49% Net investment income to av- erage daily net assets 1.21% 1.54% 1.50% 1.38% 1.15% Portfolio turnover rate 100% 76% 139% 57% 36% Average broker commission rate per equity share(c) $ .0281 N/A N/A N/A N/A Fees and expenses voluntar- ily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 (b) (b) (b) (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. (c) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. 16 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 1.SIGNIFICANT ACCOUNTING POLICIES The GMO Growth Fund (the "Fund"), formerly named the GMO Growth Allocation 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 into classes. The Fund seeks long-term growth of capital through investment of substantially all of its assets in common stocks chosen from the Wilshire 5000 Index and primarily in the equity securities of companies chosen from among the 1,200 companies with the largest equity capitalization whose securities are listed on a United States national securities exchange. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. At February 28, 1997, Class III was the only active class of shares of the Fund. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with generally accepted accounting principles 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 investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indicies. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a specified price 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 17 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon purchase of 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 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 held as of February 28, 1997. 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. SECURITY LENDING The Fund may lend its securities to certain member firms of the New York Stock Exchange. 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 28, 1997, the Fund loaned securities having a market value of $10,524,900, collateralized by cash in the amount of $10,856,000, 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 based on a notional amount. 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, 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 18 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 is 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 28, 1997. 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for redemptions in-kind. Gains associated with such in-kind redemptions amounted to $2,742,541. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules from generally accepted accounting principles. The calculation of net investment income per share in the financial highlights excludes these adjustments.
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ----------------- ------------------------ --------------- -- ($2,651,991) $2,651,991
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. 19 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income 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 in such manner as deemed equitable by the Trustees, 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 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. Prior to June 1, 1996, the premium on cash purchases was .17% of the amount invested. All purchase premiums are paid to and recorded as paid-in capital by the Fund. For the year ended February 28, 1997, the Fund received $12,425 in purchase premiums. There is no premium for cash 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 .50% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares, and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .33% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .48%; thus, the net annual expense ratio after the waiver for a Class III shareholder is unchanged. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997 was $1,742. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 20 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 3.PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short- term investments and in-kind transactions, for the year ended February 28, 1997, aggregated $305,531,085 and $512,789,249, respectively. 4.PRINCIPAL SHAREHOLDERS At February 28, 1997, 70% 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 28, 1997 February 29, 1996 Class III: -------------------------- ------------------------- Shares Amount Shares Amount ----------- ------------- ----------- ------------ Shares sold 2,041,337 $ 11,235,177 28,535,818 $138,511,760 Shares issued to shareholders in reinvestment of distributions 15,334,132 78,162,104 4,717,528 24,056,140 Shares repurchased (39,536,755) (216,785,748) (17,613,541) (88,699,098) ----------- ------------- ----------- ------------ Net increase (decrease) (22,161,286) $(127,388,467) 15,639,805 $ 73,868,802 =========== ============= =========== ============
6.FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 1997 is as follows: LONG FUTURES CONTRACTS
Number of Expiration Net Unrealized Contracts Type Date Contract Value Depreciation --------- ------- ---------- -------------- -------------- 57 S&P 500 March 1997 $22,526,400 $(307,845) =========
21 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- SWAP AGREEMENTS
Notional Amount Expiration Unrealized Fund/Counterparty Date Description Depreciation ----------------- ---------- --------------------------------- ------------ $10,856,159/ 6/26/97 Agreement with Morgan Stanley $(529,553) 9,925,759 Capital Services, Inc. dated June 26, 1996 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 6 month LIBOR adjusted by a specified spread and to receive (pay) the counterparty's notional amount multiplied by the return on the Russell 2000 Index (including dividends) less the notional amount multiplied by 6 month LIBOR adjusted by a specified spread. 10,174,543/ 9/19/97 Agreement with Morgan Stanley (1,119,968) 10,068,764 Capital Services, Inc. dated September 19, 1996 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 6 month LIBOR adjusted by a specified spread and to receive (pay) the counterparty's notional amount multiplied by the return on the Russell 2000 Index (including dividends) less the notional amount multiplied by 6 month LIBOR adjusted by a specified spread. ----------- Net unrealized depreciation $(1,649,521) ===========
22 GMO GROWTH FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION -- (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 87.09% of distributions as net capital gain dividends. 23 GMO GROWTH FUND (A SERIES OF GMO TRUST) - ------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Growth Fund returned 21.6% for the fiscal year ended February 28, 1997 as compared to 26.1% for the S&P 500 and 25.1% for the Russell 1000 Growth index. Consistent with the Fund's investment objective and policies, the Fund was invested in common stocks throughout the period. The Fund is positioned to do well in a moderate to slowing economic environment, and during the year was tilted toward defensive stocks and away from cyclical and technology stocks. The overweight in defensive stocks hurt performance, as defensive stocks underperformed the aggregate index. Several of the largest defensive bets included overweights in drug and food stocks, which are also owned because of their high quality. The Fund's tilt towards the lower growth half of the high growth universe detracted from performance, as the fastest growing companies exhibited the strongest performance for the year. For example, technology stocks, in which the Fund is underweight, outperformed the index by over 8% for the year. On the upside, an underweight in telephone stocks added substantial relative value. Despite the underperformance of defensive stocks, high quality stocks outperformed low quality stocks, and the Fund's emphasis on high quality companies added value. Stock selection added value for the year. Stocks in the best quartile of our proprietary dividend discount model had a strong year, significantly outperforming the index. Stocks not in any of our three primary selection techniques -- value, momentum and neglect -- underperformed the index, also adding value to relative performance. The Growth Fund has been substantially restructured to improve risk control in relation to the benchmark with the expectation that fiscal year 1998 returns will be significantly less volatile than fiscal year 1997 returns. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co LLC Management. They are not meant as investment advice. 24 Comparison of Change in Value of a $10,000 Investment in GMO Growth Fund Class III shares and the S & P 500 Index As of February 28, 1997 Average Annual Total Return
Since Inception 1 Year 5 Year 12/31/88 Class III 21.5% 14.9% 18.3% [Line Graph Appears Here] Date GMO Growth Fund S & P 500 Index 12/31/88 9,986 10,000 02/28/89 10,473 10,465 02/28/90 13,126 12,443 02/28/91 16,309 14,268 02/29/92 19,646 16,548 02/28/93 20,374 18,312 02/28/94 21,215 19,837 02/28/95 23,521 21,297 02/29/96 32,405 28,688 02/28/97 39,417 36,192
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. 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 paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Past performance is not indicative of future performance. Information is unaudited. GMO VALUE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 1997 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 (formerly GMO Value Allocation Fund) at February 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 10, 1997 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------- COMMON STOCKS -- 87.9% AEROSPACE -- 0.5% 3,700 Lockheed Martin Corp 327,450 1,800 Northrop Grumman Corp 130,725 36,200 Raytheon Co 1,705,925 2,300 Textron Inc 226,838 2,900 TRW Inc 151,888 ------------ 2,542,826 ------------ AUTOMOTIVE -- 4.2% 1,800 Bandag Inc 87,750 67,000 Chrysler Corp 2,269,625 1,800 Eaton Corp 129,150 3,100 Electronic Data Systems Corp 139,888 154,100 Ford Motor Co 5,066,038 139,500 General Motors Corp 8,073,563 2,800 Genuine Parts Co 130,900 4,700 Goodyear Tire & Rubber Co 247,925 1,300 Lear Corp 50,700 175,000 Mascotech Industries Inc 3,325,000 2,000 Paccar Inc 131,250 ------------ 19,651,789 ------------ BANKING AND FINANCIAL SERVICES -- 16.2% 3,900 Advanta Corp, Class A 161,363 4,700 Ahmanson (HF) & Co 193,288 39,300 American Express Co 2,569,238 17,500 American General Corp 759,063 4,800 Amsouth Bancorp 246,000 26,400 Banc One Corp 1,164,900 12,400 Bancorp Hawaii Inc 545,600 1,500 Bank of Boston Corp 113,063 4,100 Bank of New York Inc 158,875 72,000 BankAmerica Corp 8,190,000 6,400 Bankers Trust New York Corp 580,800 17,200 Banponce Corp 619,200 4,200 Barnett Banks Inc 194,250 20,755 Bear Stearns Inc 622,661 3,900 Beneficial Corp 269,588 137,500 Block (HR) Inc 4,039,063 1,800 Capital One Financial Corp 71,550
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 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------ BANKING AND FINANCIAL SERVICES -- CONTINUED 3,900 Central Fidelity Banks Inc 113,588 70,100 Chase Manhattan Corp 7,018,763 87,199 Citicorp 10,180,483 6,800 Comerica Inc 408,850 6,200 Commerce Bancshares Inc 294,500 4,300 Compass Bancshares Inc 191,888 6,500 Corestates Financial Corp 342,063 8,700 Countrywide Credit Industries Inc 253,388 41,900 Dean Witter Discover & Co 1,607,913 6,800 Donaldson Lufkin & Jenrette 292,400 16,800 Edwards (AG) Inc 596,400 32,900 Federal Home Loan Mortgage Corp 978,775 72,700 Federal National Mortgage Associates 2,908,000 4,600 First Bank of America Corp 288,075 42,400 First Chicago NBD Corp 2,480,400 500 First Empire State Corp 161,625 900 First Hawaiian Inc 29,925 3,200 First Security Corp 111,600 1,500 First Tennessee National Corp 70,125 23,300 First Union Corp (NE) 2,044,575 4,200 First Virginia Banks Inc 221,550 5,200 Firstar Corp 159,250 10,500 Fleet Financial Group Inc 640,500 10,000 Franklin Resources Inc 585,000 4,100 Golden West Financial Corp 277,775 32,300 Great Western Financial Corp 1,417,163 2,300 Green Tree Financial Corp 86,250 9,100 Greenpoint Financial Corp 546,000 2,100 Household International Inc 203,438 3,300 Huntington Bancshares Inc 94,050 5,200 J.P. Morgan & Co Inc 546,650 15,100 Key Corp 807,850 10,300 Lehman Brothers Holding Inc 346,338 3,200 Liberty Financial Cos 136,800 14,550 MBNA Corp 465,600 6,600 Mercantile Bankshares 245,025 9,100 Merrill Lynch 873,600 3,400 MGIC Investment Corp 267,325 15,800 Morgan Stanley Group Inc 997,375 12,100 National City Corp 611,050 53,400 Nationsbank Corp 3,197,325
2 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------ BANKING AND FINANCIAL SERVICES -- CONTINUED 700 Northern Trust 29,750 20,200 Norwest Corp 1,004,950 2,600 Old Kent Financial Corp 130,325 10,800 Paine Webber Group Inc 352,350 40,100 PNC Bank Corp 1,699,238 3,700 Regions Financial Corp 217,838 9,300 Republic New York Corp 863,738 3,400 Rowe (T) & Price Associates Inc 150,025 10,600 Salomon Inc 589,625 4,500 Southern National Corp 174,938 6,200 Southtrust Corp 245,675 7,200 Standard Federal Bancorp 414,900 1,800 Star Banc Corp 70,650 1,700 State Street Boston Corp 136,638 3,900 Student Loan Marketing Association 412,913 4,600 Suntrust Banks Inc 236,325 65,563 Travelers Group Inc 3,515,816 1,700 Union Planters Corp 76,075 5,700 Unionbancal Corp 343,425 5,700 US Bancorp 281,438 5,100 Wachovia Corp 310,463 7,530 Washington Federal Inc 192,015 5,200 Washington Mutual, Inc 274,950 1,800 Wells Fargo & Co 547,650 3,700 Wilmington Trust Corp 167,425 ------------ 76,036,887 ------------ CHEMICALS -- 0.8% 20,000 Albemarle Corp 392,500 2,800 Cytec Industries Inc 110,950 4,700 Eastman Chemical Co 259,088 8,600 Great Lakes Chemical Corp 398,825 15,000 Imperial Chemical Industries PLC ADR 748,125 10,000 Lubrizol Corp 346,250 21,500 Millenium Chemicals Inc 411,188 9,100 PPG Industries Inc 509,600 2,900 Sherwin Williams Co 162,763
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 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------ CHEMICALS -- CONTINUED 6,200 Union Carbide Corp 292,950 10,000 Wellman Inc 175,000 ------------ 3,807,239 ------------ COMPUTER AND OFFICE EQUIPMENT -- 1.1% 6,600 Amdahl Corp * 65,175 14,100 Apple Computer Inc * 229,125 15,100 Compaq Computer Corp * 1,196,675 7,200 Gateway 2000 Inc 423,000 4,900 Hewlett Packard Co 274,400 140,000 Intergraph Corp * 1,155,000 6,900 Lexmark International Group Inc 192,338 12,100 Micron Technology 453,750 25,000 Office Depot * 475,000 3,500 Pitney Bowes Inc 217,438 5,200 Quantum Corp * 206,700 15,000 Silicon Graphics Inc * 361,875 ------------ 5,250,476 ------------ CONSTRUCTION -- 0.1% 4,100 Centex Corp 165,538 2,800 Georgia-Pacific Corp 218,400 5,900 MEMC Electronic Materials 144,550 ------------ 528,488 ------------ CONSUMER GOODS -- 2.8% 4,100 Black and Decker Corp 129,663 7,300 Callaway Golf Co 232,688 1,100 Clorox Co 131,450 10,500 CVS Corp 485,625 63,500 Eastman Kodak Co 5,691,188 3,200 Fastenal Co 116,000 1 Footstar Inc 25 2,700 Hasbro Inc 115,425 2,100 Jones Apparel Group Inc 77,963 3,900 Lancaster Colony Corp 178,425 3,100 Liz Claiborne Inc 125,550 12,100 Mattel Co 300,988 50,000 Maytag Corp 1,100,000 23,000 Moore Corp Ltd 508,875
4 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------- CONSUMER GOODS -- CONTINUED 6,000 Nike Inc, Class B 431,250 9,000 Procter and Gamble Co 1,081,125 4,400 Reebok International Ltd 205,700 4,200 Russell Corp 158,025 82,500 Safety Kleen 1,485,000 9,600 Terra Industries Inc 130,800 5,300 VF Corp 368,350 2,700 Whirlpool Corp 136,350 ------------ 13,190,465 ------------ ELECTRONIC EQUIPMENT -- 0.8% 5,000 3 Com Corp * 165,547 10,300 American Power Conversion Corp * 215,013 3,000 Amp Inc 116,625 2,800 Arrow Electronics Inc * 157,150 2,200 Emerson Electric 217,800 2,400 Harris Corp Inc 177,000 47,500 International Rectifier Corp * 641,250 3,500 ITT Corp 197,750 4,300 Linear Technology Corp 195,650 2,700 Litton Industries* 116,100 2,900 Maxim Intergrated Products Inc * 143,913 10,500 Motorola Inc 586,688 20,500 National Semiconductor Corp * 535,563 2,400 Texas Instruments 185,100 7,000 Vishay Intertechnology Inc 160,125 3,100 Xilinx Inc * 139,888 ------------ 3,951,162 ------------ ENVIRONMENTAL CONTROL -- 1.8% 239,800 Wheelabrator Technology Inc 3,417,150 165,000 WMX Technologies 5,218,125 ------------ 8,635,275 ------------ FOOD AND BEVERAGE -- 3.0% 47,100 Anheuser Busch Cos Inc 2,095,950 59,659 Archer Daniels Midland Co 1,103,692 3,000 Coca Cola Enterprises Inc 185,250 3,100 ConAgra Inc 164,300 10,000 Coors (Adolph) Co 213,750 4,000 CPC International Inc 336,500
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 28, 1997
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------- FOOD AND BEVERAGE -- CONTINUED 50,000 Darden Restaurants Inc 362,500 43,750 Energy Group PLC ADR 1,487,500 43,750 Hanson PLC ADR 973,438 3,100 Heinz (HJ) Co 129,038 4,200 Hormel (Geo A) and Co 110,250 18,000 IBP Inc 418,500 2,500 Nabisco Holdings Corp Class A 102,813 41,100 Pepsico Inc 1,351,163 20,900 RJR Nabisco Holdings Corp 765,463 14,100 Sara Lee Corp 546,375 14,800 Seagrams Co Ltd 577,200 4,500 Tyson Food Inc Class A 91,125 15,500 Unilever NV ADR 2,952,750 6,900 Whitman Corp 162,150 ------------ 14,129,707 ------------ HEALTH CARE -- 2.0% 6,100 Apria Healthcare Group 109,038 5,800 Bard (CR) 158,775 3,800 Baxter International Inc 174,800 3,800 Becton Dickinson & Co 187,150 25,300 Bergen Brunswig Corp, Class A 812,763 79,300 Beverly Enterprises Inc * 1,139,938 8,200 BioMet Inc 125,050 17,700 Columbia HCA Healthcare Corp 743,400 7,900 Foundation Health Corp * 298,225 2,600 Guidant Corp 174,200 2,900 Hillenbrand Industries Inc 109,113 47,500 Johnson & Johnson 2,737,188 1,600 Mckesson Corp 106,000 4,300 Medtronic Inc 278,425 20,100 Pharmacia & Upjohn Inc 741,188 1,600 Rhone Poulenc Rorer Inc 113,600 21,000 Tenet Healthcare Corp * 569,625 5,400 Teradyne, Inc * 147,150 20,000 Transitional Hospitals * 180,000 4,200 United Healthcare Corp 209,475 6,800 Wellpoint Health Network 291,550 ------------ 9,406,653 ------------
6 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------- INSURANCE -- 6.2% 7,800 Aetna Life and Casualty Co 646,425 6,400 AFLAC Corp 258,400 7,200 Allmerica Property & Casualty 225,900 43,482 Allstate Corp 2,755,672 7,800 AMBAC Inc 520,650 3,300 American Bankers Insurance Group 181,913 3,800 American Financial Group Inc 142,500 8,400 American National Insurance Co 693,000 2,400 AON Corp 152,100 4,800 Chubb Corp 281,400 6,500 Cigna Corp 993,688 1,500 Cincinnati Financial Corp 103,688 5,500 CNA Financial Corp * 611,875 17,564 Conseco Inc 689,387 7,100 Equitable Companies Inc 222,763 5,400 Equitable of Iowa Cos 286,875 900 General Re Corp 152,663 4,200 Health Systems International Inc, Class A 123,375 5,500 ITT Hartford Group Inc 412,500 10,800 Lincoln National Corp 627,750 27,200 Loews Corp 2,777,800 1,600 Marsh & McLennan Cos Inc 187,200 4,100 MBIA Inc 400,263 2,900 Mercury General Corp 177,988 10,000 Ohio Casualty Corp 396,250 23,400 Old Republic International Corp 634,725 1,604 Pacificare Health Systems, Class B 134,335 3,100 Progressive Corp 204,988 4,000 Provident Cos Inc 218,000 23,200 Providian Corp 1,296,300 200,000 Reliance Group Holdings Inc 2,175,000 12,600 Reliastar Financial Corp 781,200 12,100 Safeco Corp 505,175 13,000 Saint Paul Cos Inc 877,500 152,500 TIG Holdings Inc 5,451,875 9,900 Torchmark Corp 582,863 4,700 Transamerica Corp 411,838 2,300 Transatlantic Holdings Inc 194,063 38,500 USF & G Corp 866,250
See accompanying notes to the financial statements. 7 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------- INSURANCE -- CONTINUED 10,100 USLIFE Corp 481,013 4,600 Western National Corp 105,800 ------------ 28,942,950 ------------ MACHINERY -- 1.0% 6,200 Agco Corporation 175,925 9,500 Applied Materials Inc * 480,938 6,000 Case Corp 311,250 3,700 Caterpillar Inc 289,988 100,000 Cincinnati Milacron Inc 2,150,000 3,200 Cummins Engine Inc 162,000 8,200 FMC Corp * 563,750 8,400 Tecumseh Products Co, Class B 464,100 ------------ 4,597,951 ------------ MANUFACTURING -- 4.9% 59,600 American Greetings Corp 1,847,600 11,100 Clayton Homes Inc 158,175 50,000 Corning Inc 1,881,250 2,900 Crane Co 94,613 20,000 General Electric Co 2,057,500 2,600 Harsco Corp 93,600 41,700 IBM Corp 5,994,375 6,500 International Game Technology 113,750 28,700 Lafarge Corp 667,275 6,300 Minnesota Mining And Manufacturing 579,600 72,500 Owens Corning 3,072,188 6,875 Quest Diagnostics Inc 116,016 13,800 Rockwell International Corp 893,550 4,900 Temple Inland Inc 270,113 50,000 Tenneco Inc 1,968,750 7,800 Trinity Industries Inc 251,550 40,100 United Technologies Corp 3,017,525 ------------ 23,077,430 ------------ METALS AND MINING -- 1.9% 30,300 Alcan Aluminum Ltd 1,087,013 75,000 Allegheny Teledyne Inc 1,912,500 20,400 Asarco Inc 637,500 41,000 Cyprus Amax Minerals Co 958,375 35,000 Inco Ltd 1,229,375 2,500 Newmont Mining Corp 118,750
8 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------- METALS AND MINING -- CONTINUED 5,000 Pegasus Gold* 42,813 16,100 Phelps Dodge Corp 1,151,150 22,400 Reynolds Metals Co 1,405,600 3,100 Timken Co 162,363 700 Wesco Financial Corp 145,600 ------------ 8,851,039 ------------ OIL AND GAS -- 5.4% 11,200 Amerada Hess Corp 597,800 2,400 Amoco Corp 202,800 7,600 Atlantic Richfield Co 950,000 25,000 Cabot Oil & Gas Corp, Class A 396,875 3,300 Chevron Corp 212,850 4,400 Columbia Gas Systems Inc 258,500 7,500 Dresser Industries Inc 227,813 62,500 Enron Oil & Natural Gas 1,265,625 50,000 Enserch Corp 1,050,000 12,000 Exxon Corp 1,198,500 23,900 Mitchell Energy, Class B 513,850 13,400 Mobil Corp 1,644,850 50,000 Noram Energy Corp 750,000 28,200 Occidental Petroleum Corp 719,100 25,000 Panenergy Corp 1,065,625 4,200 Phillips Petroleum Co 173,775 15,000 Questar Corp 543,750 6,200 Royal Dutch Petroleum Co ADR 1,072,600 13,900 Texaco Inc 1,374,363 8,600 Union Pacific Resources Group 209,625 150,000 Union Texas Petroleum Holdings Inc 2,775,000 68,900 Unocal Corp 2,661,263 165,400 USX--Marathon Group 4,403,775 50,000 Westcoast Energy Inc 906,250 ------------ 25,174,589 ------------ PAPER AND ALLIED PRODUCTS -- 1.4% 2,500 Bowater Inc 105,938 21,300 Champion International Corp 939,863 58,000 International Paper Co 2,421,500 25,600 James River Corp 838,400 2,900 Kimberly Clark Corp 307,400 7,100 Louisiana Pacific Corp 150,875
See accompanying notes to the financial statements. 9 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------- PAPER AND ALLIED PRODUCTS -- CONTINUED 3,500 Mead Corp 203,875 2,400 Potlatch Corp 103,800 3,200 Rayonier Inc 121,600 4,400 Sonoco Products Co 115,500 9,700 Stone Container Corp 126,100 3,100 Union Camp Corp 149,575 6,300 Westvaco Corp 185,850 15,600 Weyerhaeuser Co 721,500 4,200 Willamette Industries Inc 268,800 ------------ 6,760,576 ------------ PHARMACEUTICALS -- 2.2% 78,900 Abbott Laboratories 4,438,125 10,000 Allergan Inc 340,000 6,200 American Home Products Corp 396,800 13,300 Bristol Myers Squibb Co 1,735,650 3,700 General Nutrition Cos Inc * 66,600 25,000 Immulogic Pharmaceutical 137,500 12,500 Lilly (Eli) & Co 1,092,188 8,800 Merck & Co Inc 809,600 4,900 Schering Plough Corp 375,463 5,000 Smithkline Beecham Plc 371,250 5,600 Warner Lambert Co 470,400 ------------ 10,233,576 ------------ PRIMARY MATERIALS -- 0.1% 15,300 Premark International Inc 361,463 2,100 Vulcan Materials Co 135,975 ------------ 497,438 ------------ PRIMARY PROCESSING -- 0.7% 6,000 Alumax Inc 234,750 20,000 Bethlehem Steel Corp * 165,000 10,800 Dow Chemical Co 874,800 4,200 Du Pont (EI) De Nemours & Co Inc 450,450 22,600 LTV Corp 282,500 43,000 USX-US Steel Group Inc 1,349,125 ------------ 3,356,625 ------------
10 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------- PRINTING AND PUBLISHING -- 0.3% 8,200 Dun and Bradstreet Corp 200,900 65,000 News Corporation Ltd ADR 1,381,250 ------------ 1,582,150 ------------ REAL ESTATE -- 1.0% 60,000 Crown American Realty Trust 472,500 25,000 Evans Withycombe Residential 512,500 7,500 JP Realty Inc 193,125 10,000 Saks Holdings 335,000 100,000 Summit Properties Inc 2,025,000 50,000 Walden Residential Properties Inc 1,287,500 ------------ 4,825,625 ------------ REFINING -- 0.2% 2,500 Imperial Oil Ltd 109,688 25,000 Quaker State Corp 365,625 12,500 Sun Co Inc 337,500 ------------ 812,813 ------------ RETAIL TRADE -- 3.4% 16,600 Albertsons Inc 585,150 5,300 American Stores Co 237,175 9,000 Autozone Inc * 222,750 3,700 Circuit City Stores Inc 115,625 25,000 Cone Mills Corp 196,875 58,700 Costco Cos Inc 1,504,188 7,000 Dayton Hudson Corp 294,000 14,700 Dillard Department Stores Inc 442,838 15,700 Federated Department Stores 545,575 4,700 Fruit of the Loom Inc 192,113 18,400 Gap Inc 607,200 2,800 Hannaford Brothers Co 99,750 35,800 Kmart Corp * 447,500 33,900 Limited Inc 644,100 6,300 May Department Stores Co 293,738 15,600 Mercantile Stores 748,800 10,300 Penney (JC) Co Inc 507,275 1,500 Sears Roebuck & Co 81,375 3,500 Tandy Corp 176,313 51,900 Toys R Us Inc * 1,349,400 234,800 Wal Mart Stores Inc 6,192,850
See accompanying notes to the financial statements. 11 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------- RETAIL TRADE -- CONTINUED 5,300 Weismarkets Inc 159,000 3,300 Winn Dixie 105,188 3,900 Woolworth (FW) Co * 81,413 ------------ 15,830,191 ------------ SERVICES -- 1.6% 3,600 BHC Communications Inc, Class A 367,200 29,600 Browning Ferris Industries Inc 928,700 4,184 Chris Craft Industries Inc 172,067 6,700 Circus Circus Enterprises Inc * 209,375 1,700 Disney Walt Co 126,225 2,600 Gannett Co Inc 207,350 2,300 Healthcare Compare Corp * 98,181 5,000 Kellwood Co 118,125 2,500 Kelly Services 68,750 5,400 Kingworld Productions Inc * 200,475 20,000 Manpower Inc 755,000 1,000 Meredith Corp 49,000 50,000 Ogden Corp 1,018,750 6,600 Servicemaster Industry Inc 169,950 57,700 Supervalu Inc 1,788,700 150,000 Waste Management International PLC ADR 1,125,000 ------------ 7,402,848 ------------ TECHNOLOGY -- 6.9% 3,400 Adobe Systems Inc 124,100 11,300 Advanced Micro Devices Inc * 405,388 2,700 Autodesk Inc 91,463 7,000 Avnet Inc 437,500 16,400 Bay Networks Inc * 311,600 8,400 BMC Software Inc 359,625 12,700 Cabletron Systems Inc 381,000 14,900 Cisco Systems Inc * 828,813 100,000 Digital Equipment Corp * 3,275,000 1,700 Grainger (WW) Inc 134,725 55,100 Intel Corp 7,817,313 85,500 Microsoft Corp 8,336,250 48,200 Novell Inc * 488,025 4,900 Seagate Technology Corp 231,525 85,199 Storage Technology Corp * 3,557,058
12 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 408,400 Tandem Computers Inc * 5,105,000 6,500 Xerox Corp 406,250 ------------ 32,290,635 ------------ TELECOMMUNICATIONS -- 5.8% 97,600 AT & T Corp 3,891,800 5,900 Bell Atlantic Corp 407,838 4,600 Bellsouth Corp 215,625 22,500 Comsat Corp 590,625 30,000 Cox Communications, Class A 603,750 20,000 Frontier Corp 442,500 95,400 GTE Corp 4,459,950 106,700 MCI Communications Corp 3,814,525 11,600 Nextel Communications Inc, Class A 165,300 8,000 NYNEX Corp 412,000 40,400 Pacific Telesis Group 1,646,300 50,000 SBC Communications 2,875,000 31,700 Sprint Corp 1,442,350 100,000 Tele-Communications, Class A 1,187,500 77,400 US West Inc 2,786,400 107,900 US West Media Group 1,982,663 4,100 Viacom Inc Class B 144,525 ------------ 27,068,651 ------------ TOBACCO -- 1.8% 24,100 American Brands Inc 1,268,263 81,250 Imperial Tobacco Group Plc ADR 1,125,426 45,900 Philip Morris Cos Inc 6,202,238 ------------ 8,595,927 ------------ TRANSPORTATION -- 1.3% 17,500 American West Holdings Corp, Class B 242,813 15,700 AMR Corp * 1,234,413 9,100 Burlington Northern Santa Fe Railroad Co 757,575 90,000 Canadian Pacific 2,227,500 437 Conrail Inc 45,667 8,700 CSX Corp 401,288 4,200 Delta Air Lines Inc 338,100 2,700 Federal Express Corp 139,050 5,000 Newport News Shipbuilding 77,500 7,500 Overseas Shipholding Group Inc 130,313
See accompanying notes to the financial statements. 13 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------- TRANSPORTATION -- CONTINUED 10,000 Ryder System Inc 315,000 1,100 UAL Corp 62,425 1,600 Union Pacific Corp 96,400 ------------ 6,068,044 ------------ UTILITIES -- 8.5% 4,300 AES Corp * 281,113 12,000 American Water Works Co 280,500 5,700 Baltimore Gas and Electric Co 156,750 5,800 Boston Edison Co 155,150 50,000 Calpine Corp 918,750 29,300 Centerior Energy Corp 303,988 32,500 Cinergy Corp 1,121,250 10,100 CMS Energy Corp 330,775 7,000 Coastal Corp 318,500 35,300 Consolidated Edison 1,089,888 6,300 Delmarva Power and Light Co 122,063 3,300 Dominion Resources Inc 132,825 20,000 DPL Inc 492,500 2,700 DQE Inc 79,988 15,800 DTE Energy Co 477,950 79,300 Edison International 1,704,950 6,600 Enova Corp 147,675 90,400 Entergy Corp 2,384,300 5,000 Florida Progress Corp 157,500 4,400 FPL Group Inc 200,200 24,400 General Public Utilities Inc 854,000 4,600 Houston Industries Inc 106,950 25,500 Illinova Corp 637,500 18,400 Long Island Lighting Co 423,200 12,300 Midamerican Energy Holding Co 202,950 3,500 Montana Power Co 76,563 7,200 New England Electric System 251,100 11,900 New York State Electric and Gas Corp 276,675 232,300 Niagara Mohawk Power Corp * 2,381,075 32,800 Northeast Utilities 340,300 52,500 Ohio Edison Co 1,181,250 3,400 Pacific Enterprises 103,700 25,000 Pacificorp 515,625 24,900 Peco Energy Co 560,250 154,800 PG & E Corp 3,560,400
14 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------ UTILITIES -- CONTINUED 4,800 Pinnacle West Capital Corp 150,000 10,100 PP & L Resources Inc 231,038 70,300 Public Service Enterprise Group Inc 1,977,188 17,500 Southern Co 380,625 254,900 Texas Utilities Co 10,291,588 25,000 TransCanada Pipeline Ltd 459,375 174,300 Unicom Corp 3,878,116 5,200 Western Resources Inc 157,300 ------------ 39,853,383 ------------ TOTAL COMMON STOCKS (COST $357,176,193) 412,953,408 ------------ PREFERRED STOCKS -- 4.2% AUTOMOTIVE -- 0.1% 23,900 Mascotech Industries Inc Convertible $1.20 421,238 ------------ BANKING AND FINANCIAL SERVICES -- 0.2% 22,500 Time Warner Financing Convertible $1.24 939,375 ------------ FOOD AND BEVERAGE -- 0.9% 600,000 RJR Nabisco Holdings Convertible Series C 9.25% 4,275,000 ------------ MANUFACTURING -- 1.2% 360,000 Westinghouse Electric Corp Convertible $1.30 144A 5,580,000 ------------ METALS AND MINING -- 0.1% 7,500 Freeport McMoran Corp $0.34 248,437 ------------ PAPER AND ALLIED PRODUCTS -- 0.8% 20,000 Boise Cascade Corp Series G $1.58 540,000 100,200 James River Corp Convertible 9.00% 3,068,625 ------------ 3,608,625 ------------ REFINING -- 0.3% 30,000 Unocal Corp 144A Convertible 6.25% 1,627,500 ------------ TRANSPORTATION -- 0.6% 23,900 Navistar International Corp $6.00 1,386,200 27,500 US Air Group Inc Convertible Series B 8.75% * 1,615,625 ------------ 3,001,825 ------------ TOTAL PREFERRED STOCKS (COST $16,228,050) 19,702,000 ------------
See accompanying notes to the financial statements. 15 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 9.3% REPURCHASE AGREEMENTS -- 3.9% $18,186,275 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $18,193,625 and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $18,569,694. 18,186,275 ------------- U.S. GOVERNMENT -- 0.2% $ 1,000,000 U.S. Treasury Bill, 5.22% due 5/29/97(a) 987,746 ------------- CASH EQUIVALENTS -- 5.2%(B) 2,945,159 American AAdvantage Money Market Fund 2,945,159 $ 1,428,615 Bank of Boston Eurodollar Time Deposit, 5.5375% due 3/3/97 1,428,615 $ 1,780,506 Harris Bank and Trust Eurodollar Time Deposit, 5.375% due 3/3/97 1,780,506 15,173,393 Merrimac Cash Fund Premium Class 15,173,393 $ 3,000,000 Prudential Securities Group Inc Master Note, 5.60% due 3/3/97 3,000,000 ------------- 24,327,673 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $43,501,488) 43,501,694 ------------- TOTAL INVESTMENTS -- 101.4% (Cost $416,905,731) ** 476,157,102 Other Assets and Liabilities (net) -- (1.4)% (6,565,740) ------------- TOTAL NET ASSETS -- 100% $ 469,591,362 ============= NOTES TO THE SCHEDULE OF INVESTMENTS: ADR -- American Depositary Receipt 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. * Non-income producing security. (a) Security has been segregated to cover margin requirements on open financial futures contracts. (b) Represents investments of security lending collateral (Note 1). ** The aggregate identified cost for federal income tax purposes is $418,002,905, resulting in gross unrealized appreciation and depreciation of $67,206,417 and $9,052,220, respectively, and net unrealized appreciation of $58,154,197.
16 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $416,905,731) (Note 1) $476,157,102 Receivable for investments sold 21,559,723 Dividends and interest receivable 1,099,298 Receivable for expenses waived or borne by Manager (Note 2) 92,362 ------------ Total assets 498,908,485 ------------ LIABILITIES: Payable for investments purchased 2,239,551 Payable upon return of securities loaned (Note 1) 24,327,673 Payable for Fund shares repurchased 2,226,000 Payable to affiliate for (Note 2): Management fee 256,602 Shareholder service fee 54,986 Accrued expenses 51,307 Payable for open swap contracts (Notes 1 and 6) 154,789 Payable for variation margin on open futures contracts (Notes 1 and 6) 6,215 ------------ Total liabilities 29,317,123 ------------ NET ASSETS $469,591,362 ============ NET ASSETS CONSIST OF: Paid-in-capital $375,404,716 Accumulated undistributed net investment income 1,263,932 Accumulated undistributed net realized gain 34,051,747 Net unrealized appreciation 58,870,967 ------------ $469,591,362 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $469,591,362 ============ SHARES OUTSTANDING: Class III 31,629,482 ============ NET ASSET VALUE PER SHARE: Class III $ 14.85 ============
See accompanying notes to the financial statements. 17 GMO VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $17,955) $ 8,900,987 Interest (including securities lending income of $22,597) 887,729 ----------- Total income 9,788,716 ----------- EXPENSES: Management fee (Note 2) 2,462,093 Custodian and transfer agent fees 73,826 Audit fees 48,418 Legal fees 16,326 Registration fees 5,105 Trustees fees (Note 2) 1,690 Miscellaneous 3,440 Fees waived or borne by Manager (Note 2) (871,498) ----------- 1,739,400 Shareholder service fee (Note 2) Class III 406,469 ----------- Net expenses 2,145,869 ----------- Net investment income 7,642,847 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 65,692,516 Closed futures contracts (1,861,159) Closed swap contracts (1,056,607) ----------- Net realized gain 62,774,750 ----------- Change in net unrealized appreciation (depreciation) on: Investments (1,085,406) Open futures contracts (170,807) Open swap contracts 110,073 ----------- Net unrealized loss (1,146,140) ----------- Net realized and unrealized gain 61,628,610 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $69,271,457 ===========
18 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, 1997 FEBRUARY 29, 1996 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 7,642,847 $ 8,732,608 Net realized gain 62,774,750 57,961,119 Change in net unrealized appreciation (depreciation) (1,146,140) 33,360,660 ------------ ------------ Net increase in net assets resulting from operations 69,271,457 100,054,387 ------------ ------------ Distributions to shareholders from: Net investment income Class III (7,540,588) (9,263,106) ------------ ------------ Net realized gains Class III (44,759,234) (32,854,343) ------------ ------------ (52,299,822) (42,117,449) ------------ ------------ Net share transactions: (Note 5) Class III 135,007,878 (91,019,550) ------------ ------------ Increase (decrease) in net assets resulting from net share transactions 135,007,878 (91,019,550) ------------ ------------ Total increase (decrease) in net assets 151,979,513 (33,082,612) NET ASSETS: Beginning of period 317,611,849 350,694,461 ------------ ------------ End of period (including accumulated undistributed net investment income of $1,263,932 and $1,384,221, respectively) $469,591,362 $317,611,849 ============ ============
See accompanying notes to the financial statements. 19 GMO VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, -------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 14.25 $ 12.05 $ 13.48 $ 13.50 $ 12.94 -------- -------- -------- -------- ---------- Income from investment operations: Net investment income 0.31 0.39 0.41 0.43 0.38 Net realized and unrealized gain 2.47 3.71 0.32 1.27 0.98 -------- -------- -------- -------- ---------- Total from investment operations 2.78 4.10 0.73 1.70 1.36 -------- -------- -------- -------- ---------- Less distributions to shareholders: From net investment income (0.32) (0.39) (0.45) (0.40) (0.38) From net realized gains (1.86) (1.51) (1.71) (1.32) (0.42) -------- -------- -------- -------- ---------- Total distributions (2.18) (1.90) (2.16) (1.72) (0.80) -------- -------- -------- -------- ---------- NET ASSET VALUE, END OF PERIOD $ 14.85 $ 14.25 $ 12.05 $ 13.48 $ 13.50 ======== ======== ======== ======== ========== TOTAL RETURN(A) 21.26% 35.54% 6.85% 13.02% 11.01% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $469,591 $317,612 $350,694 $679,532 $1,239,536 Net expenses to average daily net assets 0.61% 0.61% 0.61% 0.61% 0.62% Net investment income to average daily net assets 2.17% 2.66% 2.86% 2.70% 3.15% Portfolio turnover rate 84% 65% 77% 35% 50% Average broker commission rate per equity share(b) $ .0457 N/A N/A N/A N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.04 $ 0.02 $ 0.02 $ 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. (b) For fiscal years beginning on or after September 1, 1995, a Fund is required to disclose its average commission rate per share for security trades on which commissions are charged. 20 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 1.SIGNIFICANT ACCOUNTING POLICIES The GMO Value Fund (the "Fund"), formerly named the GMO Value Allocation 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 into classes. The Fund seeks a total return greater than that of the Standard & Poor's 500 Stock Index through investment of substantially all of its assets in common stocks chosen from the Wilshire 5000 Index and primarily in common stocks chosen from among the 1,200 companies with the largest equity capitalization whose securities are listed on a United States national securities exchange. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. At February 28, 1997, Class III was the only active class of shares of the Fund. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with generally accepted accounting principles 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 investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 21 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indicies. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a specified price 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 purchase of 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 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 held as of February 28, 1997. 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. SECURITY LENDING The Fund may lend its securities to certain member firms of the New York Stock Exchange. 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 28, 1997, the Fund loaned securities having a market value of $22,715,970, collateralized by cash in the amount of $24,327,673, 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. 22 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 based on a notional amount. 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, 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 is 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 28, 1997. 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for return of capital dividends and redemptions in- kind. Gains associated with such in-kind redemptions accounted to $1,510,374. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules from generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ----------------- ------------------------ --------------- $(222,548) $(2,878,716) $3,101,264
23 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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. 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 in such manner as deemed equitable by the Trustees, 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 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. Prior to June 1, 1996, the premium on cash purchases was .15% of the amount invested. All purchase premiums are paid to and recorded as paid-in capital by the Fund. For the year ended February 28, 1997, the Fund received $194,073 in purchase premiums. There is no premium for cash 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 .70% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares, and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .46% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .61%; thus, the net annual expense ratio after the waiver for a Class III shareholder is unchanged. 24 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997 was $1,690. 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 and in-kind transactions, for the year ended February 28, 1997, aggregated $332,412,776 and $262,020,695, respectively. 4.PRINCIPAL SHAREHOLDERS At February 28, 1997, 21% of the outstanding shares of the Fund were held by one shareholder. 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 28, 1997 February 29, 1996 Class III: ------------------------ -------------------------- Shares Amount Shares Amount ---------- ------------ ----------- ------------- Shares sold 9,674,742 $141,074,274 1,619,182 $ 21,822,769 Shares issued to shareholders in reinvestment of distributions 3,486,567 48,679,629 2,797,603 37,463,449 Shares repurchased (3,824,235) (54,746,025) (11,220,138) (150,305,768) ---------- ------------ ----------- ------------- Net increase (decrease) 9,337,074 $135,007,878 (6,803,353) $ (91,019,550) ========== ============ =========== =============
25 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 6.FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 1997 is as follows: LONG FUTURES CONTRACTS
Number of Expiration Net Unrealized Contracts Type Date Contract Value Depreciation --------- ------------ ---------- -------------- -------------- 36 Russell 2000 March 1997 $ 6,476,400 $ (35,488) 29 S&P 500 March 1997 $11,460,800 $(190,127) --------- $(225,615) =========
At February 28, 1997, the Fund has sufficient cash and/or securities to cover any commitments or margin on open futures contracts. SWAP AGREEMENTS
Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------- ---------- --------------------------------- -------------- $ 3,290,979/ 5/16/97 Agreement with Morgan Stanley $9,330 3,155,364 Capital Services, Inc. dated May 20, 1996 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 6 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 6 month LIBOR adjusted by a specified spread.
26 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - --------------------------------------------------------------------------------
Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------- ---------- --------------------------------- -------------- 2,884,248/ 9/11/97 Agreement with Morgan Stanley (164,119) 2,889,514 Capital Services, Inc. dated September 9, 1996 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 6 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 6 month LIBOR adjusted by a specified spread. --------- Net unrealized depreciation $(154,789) =========
27 GMO VALUE FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION -- (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 69.32% of distributions as net capital gain dividends. 28 [THIS PAGE INTENTIONALLY LEFT BLANK] 29 GMO VALUE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. Richard A. Mayo, Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Value Fund returned 21.3% for the fiscal year ended February 28, 1997 as compared to 26.1% for the S&P 500 and 25.1% for the Russell 1000 Value Index. Consistent with the Fund's investment objective and policies, the Fund was invested in common stocks throughout the period. The Fund is positioned to do well in a moderate to slowing economic environment, and is tilted toward high quality, defensive and utility stocks. The most significant negative influence in the Fund during the year was the combination of an overweighting in utility stocks and an underweight in bank stocks. For the year, bank stocks outperformed the aggregate index by 17% and utility stocks underperformed by 18%. In addition to these strategies, the portfolio was also overweight in defensive stocks, which underperformed the index. Drug stocks, in particular, significantly underperformed for the year. Stock selection added value for the year. Stocks in the best quartile of our proprietary dividend discount model had a good year, outperforming the index. Stocks not in any of our three primary selection techniques -- value, momentum and neglect -- underperformed the index, also adding value to relative performance. The Fund continues to be positioned to benefit from the outperformance of utility stocks with attractive fundamentals in a deregulatory environment. We have, however, trimmed back the Fund's underweight in the banking sector. The Fund has been substantially restructured to improve risk control in relation to the benchmark with the expectation that fiscal year 1998 returns will be significantly less volatile than fiscal year 1997 returns. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co LLC Management. They are not meant as investment advice. 30 Comparison of Change in Value of a $10,000 Investment in GMO Value Fund Class III shares and the S & P 500 Index As of February 28, 1997 Average Annual Total Return
Since Inception 1 Year 5 Year 11/13/90 Class III 21.1% 17.0% 19.4%
[Line Graph Appears Here]
Date GMO Value Fund S & P 500 Index 11/13/90 9,986 10,000 02/28/91 12,266 11,677 02/29/92 13,853 13,544 02/28/93 15,372 14,987 02/28/94 17,372 16,236 02/28/95 18,560 17,431 02/29/96 25,156 23,479 02/28/97 30,505 29,621
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. 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 paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Class I shares and Class II shares have not commenced operations. Past performance is not indicative of future performance. Information is unaudited. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 10, 1997 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------ COMMON STOCKS -- 94.5% AEROSPACE -- 0.8% 6,400 Raytheon Co 301,600 4,500 TRW Inc 235,688 ------------ 537,288 ------------ AUTOMOTIVE -- 3.2% 100 Bandag Inc 4,875 15,700 Chrysler Corp 531,837 20,500 Ford Motor Co 673,937 11,800 General Motors Corp 682,924 1,800 Goodyear Tire & Rubber Co 94,950 4,000 Harley Davidson Inc 149,500 ------------ 2,138,023 ------------ BANKING AND FINANCIAL SERVICES -- 12.7% 6,600 Ahmanson (HF) & Co 271,425 600 American General Corp 26,025 2,100 Amsouth Bancorp 107,625 8,100 Bank of Boston Corp 610,537 8,200 Bank of New York Inc 317,750 3,500 Bankers Trust New York Corp 317,625 7,400 Barnett Banks Inc 342,250 5,635 Bear Stearns Inc 169,061 1,500 Beneficial Corp 103,688 13,464 Chase Manhattan Corp 1,348,082 1,900 Citicorp 221,825 1,000 Comdisco Inc 31,125 2,400 Countrywide Credit Industry Inc 69,900 10,500 Dean Witter Discover & Co 402,938 1,300 Edwards (AG) Inc 46,150 900 First Chicago NBD Corp 52,650 3,900 Fleet Financial Group Inc 237,900 1,300 Golden West Financial Corp 88,075 8,500 Great Western Financial Corp 372,938 1,400 Greenpoint Financial Corp 84,000 1,200 Household International Inc 116,250 2,300 Lehman Brothers Holding Inc 77,338 4,000 Mellon Bank Corp 321,500 2,700 Merrill Lynch 259,200 1,800 Morgan Stanley Group Inc 113,625 900 Paine Webber Group Inc 29,363
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 28, 1997
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------- BANKING AND FINANCIAL SERVICES -- CONTINUED 14,100 PNC Bank Corp 597,487 6,300 Salomon Inc 350,438 1,900 Southern National Corp 73,863 2,100 Student Loan Marketing Association 222,338 2,800 Summit Bancorp 133,700 1,400 Sunamerica Inc 64,225 1,900 Synovus Financial Corp 66,263 10,033 Travelers Group Inc 538,019 3,600 US Bancorp 177,750 ------------ 8,362,928 ------------ CHEMICALS -- 1.0% 1,700 Eastman Chemical Co 93,713 7,600 Monsanto Co 276,450 700 Praxair Inc 34,038 5,200 Union Carbide Corp 245,700 ------------ 649,901 ------------ COMPUTER AND OFFICE EQUIPMENT -- 2.2% 10,800 Compaq Computer Corp * 855,899 7,200 Computer Associates International Inc 313,200 1,100 HBO & Co 63,388 1 NCR Corp 25 1,500 Pitney Bowes Inc 93,188 1,200 Reynolds & Reynolds Inc, Class A 33,600 1,900 Sterling Software Inc 54,388 1,000 Western Digital Corp 59,000 ------------ 1,472,688 ------------ CONSTRUCTION -- 0.3% 3,200 Home Depot Inc 174,400 ------------ CONSUMER GOODS -- 3.6% 7,300 Callaway Golf Co 232,688 2,600 Clorox Co 310,700 4,800 CVS Corp 222,000 900 Hasbro Inc 38,475 3,100 Liz Claiborne Inc 125,550 1,800 Newell Co 66,825 3,100 Nike Inc, Class B 222,813 6,500 Procter and Gamble Co 780,812
See accompanying notes to the financial statements. 2 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------- CONSUMER GOODS -- CONTINUED 3,600 Reebok International Ltd 168,300 2,700 VF Corp 187,650 ------------ 2,355,813 ------------ ELECTRONIC EQUIPMENT -- 0.6% 800 3 Com Corp * 26,487 1,200 Cooper Industries Inc 53,100 1,000 Litton Industries * 43,000 300 Northern Telecom Ltd 21,563 800 Raychem Corp 68,100 4,800 Tellabs Inc 191,400 ------------ 403,650 ------------ ENVIRONMENTAL CONTROL -- 0.1% 4,500 Wheelabrator Technology Inc 64,125 ------------ FOOD AND BEVERAGE -- 8.9% 19,900 Anheuser Busch Cos Inc 885,549 23,249 Archer Daniels Midland Co 430,107 29,000 Coca Cola Co 1,768,999 3,100 Coca Cola Enterprises Inc 191,425 9,000 CPC International Inc 757,124 1,100 Dean Foods Co 35,888 1,300 Hormel (Geo A) and Co 34,125 4,100 IBP Inc 95,325 6,800 Pepsico Inc 223,550 15,200 Sara Lee Corp 588,999 3,100 Seagrams Co Ltd 120,900 3,400 Unilever ADR 647,699 400 Universal Foods Corp 13,800 4,100 Whitman Corp 96,350 500 Wrigley (William Jr) Co 29,938 ------------ 5,919,778 ------------ HEALTH CARE -- 2.1% 400 Becton Dickinson & Co 19,700 300 Cardinal Health Inc 18,450 500 Columbia HCA Healthcare Corp 21,000 1,200 Hillenbrand Industries Inc 45,150 5,000 Johnson & Johnson 288,125 200 McKesson Corp 13,250 11,100 Pharmacia & Upjohn Inc 409,313
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 28, 1997
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------- HEALTH CARE -- CONTINUED 14,100 Tenet Healthcare Corp * 382,463 3,900 United States Surgical Corp 166,238 800 Wellpoint Health Network 34,300 ------------ 1,397,989 ------------ INSURANCE -- 4.3% 1,900 Aetna Life and Casualty Co 157,463 2,900 AFLAC Corp 117,088 4,300 Allstate Corp 272,513 1,200 AMBAC Inc 80,100 800 Cigna Corp 122,300 400 CNA Financial Corp * 44,500 12,800 Conseco Inc 502,399 3,000 Lincoln National Corp 174,375 1,700 MBIA Inc 165,963 2,100 Old Republic International Corp 56,963 1,200 Progressive Corp 79,350 600 Provident Cos Inc 32,700 3,700 Providian Corp 206,738 4,900 Safeco Corp 204,575 4,500 Saint Paul Cos Inc 303,750 2,100 Torchmark Corp 123,638 2,400 Transamerica Corp 210,300 400 USLIFE Corp 19,050 ------------ 2,873,765 ------------ MACHINERY -- 0.3% 2,800 Baker Hughes Inc 99,400 1,100 FMC Corp * 75,625 ------------ 175,025 ------------ MANUFACTURING -- 4.5% 4,800 Corning Inc 180,600 13,300 General Electric Co 1,368,237 2,500 Gillette Co 197,813 4,500 IBM Corp 646,874 4,900 International Game Technology 85,750 1,900 Leggett & Platt Inc 68,163 3,100 Temple Inland Inc 170,888
See accompanying notes to the financial statements. 4 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------ MANUFACTURING --CONTINUED 3,500 Tyco International Ltd 206,500 900 United Technologies Corp 67,725 ------------ 2,992,550 ------------ METALS AND MINING -- 0.3% 3,100 Allegheny Teledyne Inc 79,050 1,800 Phelps Dodge Corp 128,700 ------------ 207,750 ------------ OIL AND GAS -- 7.8% 4,600 Apache Corp 148,925 3,200 Atlantic Richfield Co 400,000 2,400 Burlington Resources Inc 105,300 4,100 Chevron Corp 264,450 4,300 Columbia Natural Gas Systems Inc 252,625 1,400 Ensco International Inc * 60,725 5,400 Exxon Corp 539,324 8,400 Global Marine Inc * 156,450 600 Mobil Corp 73,650 900 Noble Affiliates Inc 35,100 4,500 Noble Drilling Corp 79,875 3,300 Occidental Petroleum Corp 84,150 1,500 Oryx Energy Co * 30,000 1,500 Pennzoil Co 86,063 10,600 Phillips Petroleum Co 438,575 2,400 Royal Dutch Petroleum Co ADR 415,200 3,700 Schlumberger Ltd 372,313 7,600 Sonat Inc 349,600 7,900 Texaco Inc 781,112 11,400 Unocal Corp 440,325 1,000 USX--Marathon Group 26,625 ------------ 5,140,387 ------------ PAPER AND ALLIED PRODUCTS -- 1.0% 1,400 Champion International Corp 61,775 6,600 International Paper Co 275,550 2,000 Mead Corp 116,500 1,800 Sonoco Products Co 47,250 4,300 Westvaco Corp 126,850 500 Willamette Industries Inc 32,000 ------------ 659,925 ------------
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 28, 1997
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------- PHARMACEUTICALS -- 10.1% 27,800 Abbott Laboratories 1,563,749 600 Allergan Inc 20,400 10,100 American Home Products Corp 646,399 13,800 Bristol Myers Squibb Co 1,800,899 3,700 Lilly (Eli) & Co 323,288 9,800 Merck & Co Inc 901,599 3,500 Pfizer Inc 320,688 4,000 Schering Plough Corp 306,500 9,300 Warner Lambert Co 781,199 ------------ 6,664,721 ------------ PRIMARY MATERIALS -- 0.0% 200 Vulcan Materials Co 12,950 ------------ PRIMARY PROCESSING -- 0.1% 2,900 USX-US Steel Group Inc 90,988 ------------ REFINING -- 0.1% 500 Murphy Oil Corp 23,188 2,600 Tosco Corp 72,475 ------------ 95,663 ------------ RETAIL TRADE -- 5.3% 11,800 Albertsons Inc 415,950 6,500 American Stores Co 290,875 12,400 Dayton Hudson Corp 520,799 6,600 Dillard Department Stores Inc 198,825 3,800 Fruit of the Loom Inc 155,325 6,300 Gap Inc 207,900 25,300 Kmart Corp * 316,250 2,800 May Department Stores Co 130,550 5,300 Penney (JC) Co Inc 261,025 5,600 Safeway Inc * 269,500 2,200 TJX Cos Inc 91,850 12,600 Toys R Us Inc * 327,600 11,900 Wal Mart Stores Inc 313,863 ------------ 3,500,312 ------------ SERVICES -- 0.2% 300 BHC Communications Inc, Class A 30,600 200 Circus Circus Enterprises Inc * 6,250 400 Equifax Inc 11,900 300 Fleming Cos Inc 5,250
See accompanying notes to the financial statements. 6 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------- SERVICES --CONTINUED 400 Robert Half International Inc 16,650 2,700 Supervalu Inc 83,700 ------------ 154,350 ------------ TECHNOLOGY -- 9.1% 3,000 Advanced Micro Devices Inc * 107,625 2,300 Avnet Inc 143,750 1,400 Cabletron Systems Inc 42,000 8,500 Cisco Systems Inc * 472,813 6,400 Dell Computer Corp 455,200 800 Grainger (WW) Inc 63,400 13,600 Intel Corp 1,929,499 17,700 Microsoft Corp 1,725,749 6,600 Oracle Corp 259,050 200 Seagate Technology Corp 9,450 8,800 Storage Technology Corp * 367,400 7,100 Xerox Corp 443,750 ------------ 6,019,686 ------------ TELECOMMUNICATIONS -- 5.5% 24,200 AT & T Corp 964,974 2,500 Bell Atlantic Corp 172,813 400 Bellsouth Corp 18,750 700 Cincinnati Bell Inc 43,400 5,700 GTE Corp 266,475 7,000 MCI Communications Corp 250,250 5,300 NYNEX Corp 272,950 17,700 Pacific Telesis Group 721,274 18,700 Sprint Corp 850,849 3,200 US West Inc 115,200 ------------ 3,676,935 ------------ TRANSPORTATION -- 1.7% 9,600 Burlington Northern Santa Fe Railroad Co 799,199 3,500 CSX Corp 161,438 4,400 Ryder System Inc 138,600 ------------ 1,099,237 ------------ UTILITIES -- 8.7% 2,300 AES Corp * 150,363 4,800 Allegheny Power System Inc 147,000 7,100 American Electric Power Inc 296,425
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 28, 1997
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------- UTILITIES -- CONTINUED 7,300 Baltimore Gas and Electric Co 200,750 3,200 Carolina Power and Light Co 118,800 11,100 Central & South West Corp 270,563 9,200 Cinergy Corp 317,400 1,700 Citizens Utilities, Class B 20,188 4,000 CMS Energy Corp 131,000 3,100 Coastal Corp 141,050 1,700 Dominion Resources Inc 68,425 4,500 DPL Inc 110,813 3,300 DQE Inc 97,763 7,400 Duke Power Co 327,450 17,200 Edison International 369,800 1,600 Enova Corp 35,800 17,000 Entergy Corp 448,375 10,500 Houston Industries Inc 244,125 4,700 Illinova Corp 117,500 2,000 LG&E Energy Corp 49,500 5,500 Long Island Lighting Co 126,500 3,600 New York State Electric and Gas Corp 83,700 1,700 Northern States Power Co 80,963 9,500 Pacificorp 195,938 3,200 Portland General Electric Co 125,200 3,400 Potomac Electric Power Co 86,275 2,100 PP & L Resources Inc 48,038 1,700 Public Service of Colorado 66,300 2,200 Scana Corp 57,475 33,000 Southern Co 717,749 3,500 Teco Energy Inc 85,313 8,300 Texas Utilities Co 335,113 4,500 Wisconsin Energy Corp 115,313 ------------ 5,786,967 ------------ TOTAL COMMON STOCKS (Cost $56,943,215) 62,627,794 ------------
See accompanying notes to the financial statements. 8 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
PAR VALUE/ ($) SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------ SHORT-TERM INVESTMENTS -- 8.3% CASH EQUIVALENTS -- 4.1%(B) 313,076 American AAdvantage Money Market Fund 313,076 $1,518,597 Bank of Boston Eurodollar Time Deposit, 5.5375% due 3/3/97 1,518,597 $ 263,678 Harris Bank and Trust Eurodollar Time Deposit, 5.375% due 3/3/97 263,678 601,049 Merrimac Cash Fund Premium Class 601,049 ------------ 2,696,400 U.S. GOVERNMENT -- 0.4% $ 250,000 U.S. Treasury Bill, 5.22% due 5/29/97(a) 246,937 ------------ REPURCHASE AGREEMENTS -- 3.8% 2,554,346 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $2,555,378 and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $2,608,199. 2,554,346 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $5,497,561) 5,497,683 ------------ TOTAL INVESTMENTS -- 102.8% (Cost $62,440,776) ** 68,125,477 Other Assets and Liabilities (net) -- (2.8)% (1,865,042) ------------ TOTAL NET ASSETS -- 100% $66,260,435 ============ NOTES TO THE SCHEDULE OF INVESTMENTS: ADR -- American Depositary Receipt * Non-income producing security. (a) Security has been segregated to cover margin requirements on open financial futures contracts. (b) Represents investments of securities lending collateral. (Note 1). ** The aggregate identified cost for federal income tax purposes is $62,526,329, resulting in gross unrealized appreciation and depreciation of $6,530,150 and $931,002, respectively, and net unrealized appreciation of $5,599,148.
See accompanying notes to the financial statements. 9 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $62,440,776) (Note 1) $68,125,477 Receivable for investments sold 1,543,422 Dividends and interest receivable 141,172 Receivable for expenses waived or borne by Manager (Note 2) 15,291 Receivable for Fund shares sold 82,515 ----------- Total assets 69,907,877 ----------- LIABILITIES: Payable for investments purchased 789,613 Payable upon return of securities loaned (Note 1) 2,696,400 Payable to affiliate for (Note 2): Management fee 25,701 Shareholder service fee 7,711 Accrued expenses 42,518 Payable for open swap contracts (Notes 1 and 6) 84,699 Payable for variation margin on open futures contracts (Notes 1 and 6) 800 ----------- Total liabilities 3,647,442 ----------- NET ASSETS $66,260,435 =========== NET ASSETS CONSIST OF: Paid-in-capital $49,503,672 Accumulated undistributed net investment income 165,058 Accumulated undistributed net realized gain 11,004,259 Net unrealized appreciation 5,587,446 ----------- $66,260,435 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $66,260,435 =========== SHARES OUTSTANDING: Class III 5,106,204 =========== NET ASSET VALUE PER SHARE: Class III $ 12.98 ===========
See accompanying notes to the financial statements. 10 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $2,705) $ 1,127,362 Interest (including securities lending income of $1,975) 220,808 ----------- Total income 1,348,170 ----------- EXPENSES: Management fee (Note 2) 291,746 Custodian and transfer agent fees 49,146 Audit fees 47,383 Registration fees 3,685 Legal fees 2,851 Trustees fees (Note 2) 321 Miscellaneous 857 Fees waived or borne by Manager (Note 2) (183,825) ----------- 212,164 Shareholder service fee (Note 2) Class III 67,968 ----------- Net expenses 280,132 ----------- Net investment income 1,068,038 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 17,074,290 Closed futures contracts 549,094 Closed swap contracts (427,720) ----------- Net realized gain 17,195,664 ----------- Change in net unrealized appreciation (depreciation) on: Investments (6,061,418) Open futures contracts (42,551) Open swap contracts (5,751) ----------- Net unrealized loss (6,109,720) ----------- Net realized and unrealized gain 11,085,944 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $12,153,982 ===========
See accompanying notes to the financial statements. 11 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, 1997 FEBRUARY 29, 1996 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,068,038 $ 1,281,438 Net realized gain 17,195,664 9,934,207 Change in net unrealized appreciation (depreciation) (6,109,720) 7,259,517 ------------ ----------- Net increase in net assets resulting from operations 12,153,982 18,475,162 ------------ ----------- Distributions to shareholders from: Net investment income Class III (1,070,308) (1,114,110) ------------ ----------- Net realized gains Class III (10,440,389) (6,201,500) ------------ ----------- (11,510,697) (7,315,610) ------------ ----------- Net share transactions: (Note 5) Class III 8,132,135 (1,643,268) ------------ ----------- Increase (decrease) in net assets resulting from net share transactions 8,132,135 (1,643,268) ------------ ----------- Total increase in net assets 8,775,420 9,516,284 NET ASSETS: Beginning of period 57,485,015 47,968,731 ------------ ----------- End of period (including accumulated undistributed net investment income of $165,058 and $167,328, respectively) $ 66,260,435 $57,485,015 ============ ===========
See accompanying notes to the financial statements. 12 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, ------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.93 $ 10.65 $ 11.07 $ 11.35 $ 10.50 ------- ------- ------- ------- ------- Income from investment operations: Net investment income 0.24 0.28 0.23 0.34 0.31 Net realized and unrealized gain 2.41 3.71 0.50 1.18 0.84 ------- ------- ------- ------- ------- Total from investment operations 2.65 3.99 0.73 1.52 1.15 ------- ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.24) (0.25) (0.28) (0.35) (0.30) From net realized gains (2.36) (1.46) (0.87) (1.45) -- ------- ------- ------- ------- ------- Total distributions (2.60) (1.71) (1.15) (1.80) (0.30) ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 12.98 $ 12.93 $ 10.65 $ 11.07 $ 11.35 ======= ======= ======= ======= ======= TOTAL RETURN(A) 22.76% 38.64% 7.36% 14.12% 11.20% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $66,260 $57,485 $47,969 $55,845 $85,232 Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48% 0.49% Net investment income to average daily net assets 1.83% 2.25% 2.52% 2.42% 2.88% Portfolio turnover rate 131% 81% 112% 38% 56% Average broker commission rate per equity share(b) $ .0259 N/A N/A N/A N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.04 $ 0.03 $ 0.03 $ 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) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. See accompanying notes to the financial statements. 13 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 1.SIGNIFICANT ACCOUNTING POLICIES The 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 into classes. The Fund seeks a total return greater than that of the Standard & Poor's 500 Stock Index through investment of substantially all of its assets in common stocks chosen from the Wilshire 5000 Index and primarily in common stocks chosen from among the 1,200 companies with the largest equity capitalization whose securities are listed on a United States national securities exchange which are not tobacco producing issuers. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. At February 28, 1997, Class III was the only active class of shares of the Fund. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with generally accepted accounting principles 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 investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indicies. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a specified price at a given date. The Fund may use futures contracts to manage its exposure to 14 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 purchase of 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 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 held as of February 28, 1997. 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. SECURITY LENDING The Fund may lend its securities to certain member firms of the New York Stock Exchange. 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 28, 1997, the Fund loaned securities having a market value of $2,619,888, collateralized by cash in the amount of $2,696,400, 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 based on a notional amount. 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, respectively. Equity swaps are marked to market daily based upon quotations from market makers and the change, if any, is 15 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 is 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 28, 1997. 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. 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. 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 in such manner as deemed equitable by the Trustees, 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- 16 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- rata among the classes 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. Prior to June 1, 1996, the premium on cash purchases was .17% of the amount invested. All purchase premiums are paid to and recorded as paid-in capital by the Fund. For the year ended February 28, 1997, the Fund received $14,385 in purchase premiums. There is no premium for cash 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 .50% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares, and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .33% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .48%; thus, the net annual expense ratio after the waiver for a Class III shareholder is unchanged. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997 was $321. 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 28, 1997, aggregated $70,870,549 and $87,252,931, respectively. 4.PRINCIPAL SHAREHOLDERS At February 28, 1997, 92% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. 17 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 28, 1997 February 29, 1996 Class III: ------------------------ ------------------------ Shares Amount Shares Amount ---------- ------------ ---------- ------------ Shares sold 1,730,490 $ 22,801,781 781,571 $ 9,065,588 Shares issued to shareholders in reinvestment of distributions 933,753 11,510,697 594,645 7,315,610 Shares repurchased (2,002,361) (26,180,343) (1,434,132) (18,024,466) ---------- ------------ ---------- ------------ Net increase (decrease) 661,882 $ 8,132,135 (57,916) $ (1,643,268) ========== ============ ========== ============
6.FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 1997 is as follows: LONG FUTURES CONTRACTS
Number of Expiration Net Unrealized Contracts Type Date Contract Value Depreciation --------- ------------ ---------- -------------- -------------- 4 Russell 2000 March 1997 $ 719,600 $ (3,943) 4 S&P 500 March 1997 1,580,800 (8,613) -------- $(12,556) ========
18 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- At February 28, 1997, the Fund has sufficient cash and/or securities to cover any commitments or margin on open futures contracts. SWAP AGREEMENTS
Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------- ---------- --------------------------------- -------------- $1,403,323/ 5/16/97 Agreement with Morgan Stanley $ 3,978 1,345,495 Capital Services, Inc. dated May 20, 1996 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 6 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 6 month LIBOR adjusted by a specified spread. 1,558,424/ 9/11/97 Agreement with Morgan Stanley (88,677) 1,561,269 Capital Services, Inc. dated September 9, 1996 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 6 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 6 month LIBOR adjusted by a specified spread. -------- Net unrealized depreciation $(84,699) ========
19 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION -- (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 77.10% of distributions as net capital gain dividends. 20 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Tobacco-Free Core Fund returned 22.8% for the fiscal year ended February 28, 1997, as compared to 26.1% for the S&P 500. Consistent with the Fund's investment objective and policies, the Fund was invested substantially in common stocks throughout the period. The majority of the Fund's performance shortfall was due to three sector strategies which underperformed for the year. The first of these strategies involved underweighting banks and overweighting utilities, a strategy which was based upon our view that utility stocks are significantly undervalued relative to their historical levels, and that banks, which are in the sixth year of a rally off their 1990 laws, are overvalued. Historically both sectors have underperformed in periods of rising interest rates and the strategy was expected to have a neutral impact if rates did not fact increase. This year, however, banks moved up and utilities moved down relative to the market in an environment of rising interest rates. Therefore, rather than having the neutralizing effect that was intended, both strategies hurt the performance of the Fund. The second sector strategy, overweighting defensive stocks and underweighting cyclical stocks, also impacted performance negatively, primarily during the rally of cyclical stocks in the early part of the year. Last, our underweight position in the largest 100 industrials hurt relative performance in an environment where the largest capitalization stocks carried the market, significantly outperforming smaller industrial stocks for the year. Tobacco stocks had a strong year, outperforming the S&P 500 by 10%; therefore the result of not owning tobacco stocks in the Fund had a slightly negative impact for the year. In addition to the aforementioned sector bets, the three GMO stock selection parameters -- value, momentum and neglect -- had mixed results for the year. Relative to the S&P 500, our dividend discount model provided positive contributions to return while the momentum and neglect models both experienced negative value-added versus the index. OUTLOOK The Fund's overweighting in utility stocks, which is in companies with good fundamental prospects in the continuing deregulatory environment, remains unchanged. We are also overweight in small-cap stocks, which appear very attractive relative to their historical levels and to the valuations for large capitalization stocks. 21 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- With large-cap value stocks approaching more attractive valuation levels following the rally of large-cap growth stocks, we have increased the weight of the value stream in the portfolio. The weights of the momentum and neglect streams have been reduced somewhat. We believe that growth of the derivatives markets and increased participation of hedge funds has made stock and sector moves sharper and less predictable. As a result, we have enhanced our risk controls to accommodate a more volatile and difficult market environment. We are confident that with stricter risk parameters in place, the Tobacco-Free Core Fund's volatility will resume the well-controlled behavior that has been the cornerstone of our long-term performance. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co LLC Management. They are not meant as investment advice. 22 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 28, 1997 Average Annual Total Return
Since Inception 1 Year 5 Year 10/31/91 Class III 22.6% 18.3% 18.2% [Line Graph Appears Here] Date GMO Tobacco-Free Core Fund S & P 500 Index 10/31/91 9,986 10,000 02/29/92 10,545 10,631 02/28/93 11,724 11,764 02/28/94 13,380 12,744 02/28/95 14,363 13,682 02/29/96 19,913 18,430 02/28/97 24,445 23,251
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 waived during the periods shown. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 14bp on the purchase. Transaction fees are paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Class I shares and Class II shares have not commenced operations. Past performance is not indicative of future performance. Information is unaudited. GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 10, 1997 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------- COMMON STOCKS -- 88.1% AEROSPACE -- 0.1% 1,500 Boeing Company 152,614 ------------ AUTOMOTIVE -- 2.0% 5,000 Chrysler Corp 169,375 7,500 Ford Motor Co 246,563 20,000 General Motors Corp 1,157,500 150,000 Mascotech Industries Inc 2,850,000 10,000 Titan Wheel International Inc 141,250 ------------ 4,564,688 ------------ BANKING AND FINANCIAL SERVICES -- 9.4% 45,000 American Express Co 2,941,875 125,000 Block (HR) Inc 3,671,875 50,000 Chase Manhattan Corp 5,006,250 37,500 Citicorp 4,378,125 15,000 Great Western Financial Corp 658,125 5,000 Nationsbank Corp 299,375 20,000 PNC Bank Corp 847,500 50,000 Travelers Group Inc 2,681,250 5,000 Wells Fargo & Co 1,521,250 ------------ 22,005,625 ------------ CHEMICALS -- 1.1% 10,000 Agrium Inc 137,500 25,000 Albemarle Corp 490,625 10,000 Borden Chemical & Plastics L. P. 115,000 10,000 Engelhard Corp 221,250 12,500 Georgia Gulf Corp 337,500 12,500 IMC Global Inc 435,938 5,000 Lubrizol Corp 173,125 15,357 Millenium Chemicals Inc 293,703 22,500 Wellman Inc 393,750 ------------ 2,598,391 ------------ COMPUTER AND OFFICE EQUIPMENT -- 0.5% 100,000 Intergraph Corp * 825,000 2,500 Micron Technology 93,750 1 NCR Corp 8
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 28, 1997
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------- COMPUTER AND OFFICE EQUIPMENT -- CONTINUED 10,000 Silicon Graphics Inc * 241,250 ------------ 1,160,008 ------------ CONSTRUCTION -- 0.2% 28,125 Hanson PLC ADR 625,781 ------------ CONSUMER GOODS -- 4.8% 35,000 Black and Decker Corp 1,106,875 20,000 Burlington Industries Inc 257,500 70,000 Eastman Kodak Co 6,273,750 5,000 Jostens Inc 107,500 35,000 Maytag Corp 770,000 2,500 Procter and Gamble Co 300,313 100,000 Safety Kleen 1,800,000 25,000 Scotts Company, Class A 531,250 ------------ 11,147,188 ------------ ELECTRONIC EQUIPMENT -- 0.3% 25,000 International Rectifier Corp * 337,500 2,500 Motorola Inc 139,688 5,000 National Semiconductor Corp * 130,625 ------------ 607,813 ------------ ENVIRONMENTAL CONTROL -- 2.7% 85,000 Wheelabrator Technology Inc 1,211,250 162,500 WMX Technologies 5,139,063 ------------ 6,350,313 ------------ FOOD AND BEVERAGE -- 2.4% 12,500 Anheuser Busch Cos Inc 556,250 25,000 Coors (Adolph) Co 534,375 25,000 Cott Corp 246,093 25,000 Darden Restaurants Inc 181,250 45,000 Nestle SA ADR 2,449,791 20,000 Sara Lee Corp 775,000 4,000 Unilever NV ADR 762,000 ------------ 5,504,759 ------------ HEALTH CARE -- 2.2% 42,500 Baxter International Inc 1,955,000 10,000 Bergen Brunswig Corp, Class A 321,250 75,000 Beverly Enterprises Inc * 1,078,125
See accompanying notes to the financial statements. 2 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------- HEALTH CARE -- CONTINUED 5,000 Haemonetics Corp * 86,250 7,500 Johnson & Johnson 432,188 7,500 Nellcor Puritan Bennett Inc 130,313 50,000 Owens and Minor Holdings Co 512,500 25,000 Perrigo Co * 303,125 5,625 Quest Diagnostics Inc 94,922 20,000 Transitional Hospitals * 180,000 ------------ 5,093,673 ------------ INSURANCE -- 6.5% 7,500 Aetna Life and Casualty Co 621,563 10,000 Allamerica Financial Corp 373,750 25,000 Allstate Corp 1,584,375 15,000 Chartwell Re Corp 412,500 2,500 Cigna Corp 382,188 1,900 Gallagher (Arthur J) and Co 58,425 5,000 Loews Corp 510,625 200,000 Reliance Group Holdings Inc 2,175,000 50,000 Sedgwick Group ADR 517,995 125,000 TIG Holdings Inc 4,468,750 10,000 Transamerica Corp 876,250 50,000 USF & G Corp 1,125,000 25,000 Washington National Corp 712,500 70,000 Willis Corroon Group Plc ADR 848,750 10,000 Zurich Reinsurance Centre Inc 383,750 ------------ 15,051,421 ------------ MACHINERY -- 1.5% 75,000 Cincinnati Milacron Inc 1,612,500 10,000 Cummins Engine Inc 506,250 15,000 FMC Corp * 1,031,250 25,000 Giddings and Lewis Inc 345,313 ------------ 3,495,313 ------------ MANUFACTURING -- 9.0% 35,000 American Greetings Corp 1,085,000 45,000 Corning Inc 1,693,125 22,500 General Electric Co 2,314,688 50,000 Griffon Corp * 700,000 30,000 IBM Corp 4,312,500
See accompanying notes to the financial statements. 3 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------- MANUFACTURING -- CONTINUED 15,000 Lafarge Corp 348,750 95,000 Owens Corning 4,025,625 40,000 Rockwell International Corp 2,590,000 22,500 Tenneco Inc 885,938 40,000 United Technologies Corp 3,010,000 ------------ 20,965,626 ------------ METALS AND MINING -- 2.3% 7,500 Alcan Aluminum Ltd 269,063 102,500 Allegheny Teledyne Inc 2,613,750 35,000 Amcol International Corp 660,625 10,000 Asarco Inc 312,500 10,000 Cyprus Amax Minerals Co 233,750 10,001 Echo Bay Mines Ltd 77,505 10,000 Falconbridge Ltd 233,374 5,000 Newmont Mining Corp 237,500 25,000 Pittston Minerals Group 362,500 10,000 Placer Dome Inc 215,000 2,500 Reynolds Metals Co 156,875 ------------ 5,372,442 ------------ OIL AND GAS -- 9.0% 10,000 Amerada Hess Corp 533,750 5,000 Atlantic Richfield Co 625,000 25,000 Cabot Oil & Gas Corp, Class A 396,875 15,000 Coflexip SA ADR * 417,188 5,000 Dresser Industries Inc 151,875 50,000 Enron Oil & Gas 1,012,500 45,000 Enserch Corp 945,000 75,000 Lasmo Plc ADR 890,625 25,000 Mitchell Energy, Class A 525,000 55,000 Mitchell Energy, Class B 1,182,500 110,000 Noram Energy Corp 1,650,000 25,000 Occidental Petroleum Corp 637,500 80,000 Panenergy Corp 3,410,000 17,500 Questar Corp 634,375 5,000 Texaco Inc 494,375 5,000 Total SA 198,125 50,000 Union Texas Petroleum Holdings Inc 925,000 45,000 Unocal Corp 1,738,125
See accompanying notes to the financial statements. 4 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------- OIL AND GAS -- CONTINUED 125,000 USX -- Marathon Group 3,328,125 75,000 Westcoast Energy Inc 1,359,375 ------------ 21,055,313 ------------ PAPER AND ALLIED PRODUCTS -- 1.0% 10,000 Champion International Corp 441,250 10,000 International Paper Co 417,500 25,000 James River Corp 818,750 5,000 Jefferson Smurfit Corp 68,125 2,500 Stone Container Corp 32,500 12,500 Weyerhaeuser Co 578,125 ------------ 2,356,250 ------------ PHARMACEUTICALS -- 1.3% 7,500 Glaxo Wellcome Plc ADR 254,063 25,000 Lilly (Eli) & Co 2,184,375 7,500 Smithkline Beecham Plc 556,875 ------------ 2,995,313 ------------ PRIMARY PROCESSING -- 0.9% 25,000 Armco Inc * 103,125 5,000 Dow Chemical Co 405,000 5,000 Du Pont (EI) De Nemours & Co Inc 536,250 25,000 Intermet Corp 378,125 25,000 Northwestern Steel And Wire 106,250 15,000 USX-US Steel Group Inc 470,625 ------------ 1,999,375 ------------ PRINTING AND PUBLISHING -- 0.5% 50,000 News Corporation Ltd ADR 1,062,500 ------------ REAL ESTATE -- 3.5% 50,000 Amli Residential Properties Trust 1,187,500 35,000 Crown American Realty Trust 275,625 3,800 Irvine Apartment Communities 102,600 85,000 JP Realty Inc 2,188,750 10,000 Regency Realty Corp 273,750 30,000 Simon Debartolo Group Inc 903,750 77,500 Summit Properties Inc 1,569,375 62,500 Walden Residential Properties Inc 1,609,375 ------------ 8,110,725 ------------
See accompanying notes to the financial statements. 5 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------- REFINING -- 0.2% 37,500 Quaker State Corp 548,438 ------------ RETAIL TRADE -- 2.8% 15,000 American Stores Co 671,250 75,000 Costco Cos Inc 1,921,875 35,000 Federated Department Stores 1,216,250 105,000 Wal Mart Stores Inc 2,769,375 ------------ 6,578,750 ------------ SERVICES -- 1.6% 20,000 Cordiant Plc ADR * 97,500 15,000 Manpower Inc 566,250 25,000 Morningstar Group Inc * 575,000 50,000 Ogden Corp 1,018,750 22,000 Pinkertons Inc 580,250 112,500 Waste Management International PLC ADR 843,750 ------------ 3,681,500 ------------ TECHNOLOGY -- 7.3% 35,000 Avnet Inc 2,187,500 15,000 Bay Networks Inc * 285,000 45,000 Data General Corp * 871,875 75,000 Digital Equipment Corp * 2,456,250 10,000 Intel Corp 1,418,750 25,000 Novell Inc * 253,125 117,500 Storage Technology Corp * 4,905,625 287,500 Tandem Computers Inc * 3,593,750 15,000 Xerox Corp 937,500 ------------ 16,909,375 ------------ TELECOMMUNICATIONS -- 5.4% 12,500 AT & T Corp 498,438 5,000 Bell Atlantic Corp 345,625 25,000 Cox Communications, Class A 503,125 5,000 Frontier Corp 110,625 90,000 GTE Corp 4,207,500 7,500 Liberty Media Group, Class A 157,500 2,500 Lucent Technologies 134,687 50,000 MCI Communications Corp 1,787,500 25,000 Pacific Telesis Group 1,018,750
See accompanying notes to the financial statements. 6 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------- TELECOMMUNICATIONS -- CONTINUED 10,000 SBC Communications 575,000 7,500 TCI Satellite Entertainment, Class A 60,000 75,000 Tele-Communications, Class A 890,625 25,000 US West Inc 900,000 75,000 US West Media Group 1,378,125 ------------ 12,567,500 ------------ TOBACCO -- 0.4% 75,000 Imperial Tobacco Group Plc ADR 1,038,855 ------------ TRANSPORTATION -- 1.9% 12,500 AMR Corp * 982,813 80,000 Canadian Pacific 1,980,000 7,500 Delta Air Lines Inc 603,750 10,000 Hunt (JB) Transportation Services Inc 138,750 10,000 Navistar International Corp * 96,250 5,000 Overseas Shipholding Group Inc 86,875 10,000 Ryder System Inc 315,000 10,000 USAir Group Inc * 197,500 ------------ 4,400,938 ------------ UTILITIES -- 7.3% 50,000 Calpine Corp 918,750 20,000 Cinergy Corp 690,000 5,000 CMS Energy Corp 163,750 25,000 DPL Inc 615,625 15,000 DTE Energy Co 453,750 28,125 Energy Group PLC ADR 956,250 52,500 Entergy Corp 1,384,688 125,000 Niagara Mohawk Power Corp * 1,281,250 25,000 Northeast Utilities 259,375 25,000 Ohio Edison Co 562,500 37,200 Pacificorp 767,250 20,000 PG & E Corp 460,000 25,000 Public Service Enterprise Group Inc 703,125 25,000 Southern Co 543,750 87,500 Texas Utilities Co 3,532,813 75,000 TransCanada Pipeline Ltd 1,378,125 100,000 Unicom Corp 2,225,000 ------------ 16,896,001 ------------ TOTAL COMMON STOCKS (COST $149,117,271) 204,896,488 ------------
See accompanying notes to the financial statements. 7 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- PREFERRED STOCKS -- 10.2% AUTOMOTIVE -- 0.3% 38,600 Mascotech Industries Inc Convertible $1.20 680,325 ------------ BANKING AND FINANCIAL SERVICES -- 0.2% 10,000 Time Warner Financing Convertible $1.24 417,500 ------------ FOOD AND BEVERAGE -- 1.6% 525,000 RJR Nabisco Holdings Convertible Series C 9.25% 3,740,625 ------------ INSURANCE -- 0.6% 25,000 Alexander & Alexander Services Inc Convertible $3.63 144A 1,318,750 ------------ MANUFACTURING -- 1.6% 237,500 Westinghouse Electric Corp Convertible $1.30 144A 3,681,250 ------------ METALS AND MINING -- 0.8% 5,000 Battle Mountain Gold Convertible $3.25 255,000 50,300 Freeport McMoran Corp $0.34 1,666,188 ------------ 1,921,188 ------------ OIL AND GAS -- 0.5% 15,000 Atlantic Richfield Co Convertible 9.00% 343,125 75,000 Santa Fe Energy Resources Inc Convertible 8.25% 815,625 ------------ 1,158,750 ------------ PAPER AND ALLIED PRODUCTS -- 1.6% 25,000 Boise Cascade Corp Series G $1.58 675,000 97,500 James River Corp Convertible 9.00% 2,985,938 ------------ 3,660,938 ------------ PRIMARY PROCESSING -- 0.1% 5,000 Armco Inc Convertible $3.625 207,500 ------------ REFINING -- 1.4% 24,500 Ashland Inc Convertible $3.125 1,592,500 30,000 Unocal Corp Convertible 6.25% 144A 1,627,500 ------------ 3,220,000 ------------
See accompanying notes to the financial statements. 8 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------- SERVICES -- 0.2% 25,000 International Technology Corp Convertible 7.00% 462,500 ------------ TELECOMMUNICATIONS -- 0.2% 15,000 Sprint Corp Convertible 8.25% 526,875 ------------ TRANSPORTATION -- 1.0% 26,100 Navistar International Corp $6.00 1,513,800 15,000 US Air Group Inc Convertible Series B $4.38 * 881,250 ------------ 2,395,050 ------------ UTILITIES -- 0.1% 10,000 MCN Corp Convertible 285,000 ------------ TOTAL PREFERRED STOCKS (COST $20,193,514) 23,676,251 ------------ DEBT OBLIGATIONS -- 0.8% HEALTH CARE -- 0.5% $2,500,000 Roche Holdings Inc, 0.00% due 4/20/10 1,156,250 ------------ OIL AND GAS -- 0.3% $1,000,000 Noram Energy Corp, 6.00% due 3/15/12 875,000 ------------ TOTAL DEBT OBLIGATIONS (COST $1,812,697) 2,031,250 ------------ SHORT-TERM INVESTMENTS -- 5.7% REPURCHASE AGREEMENTS -- 0.5% $1,124,989 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $1,125,443 and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $1,148,707. 1,124,989 ------------ CASH EQUIVALENTS -- 5.2%(A) 1,403,114 American AAdvantage Money Market Fund 1,403,114 $4,166,139 Bank of Boston Eurodollar Time Deposit, 5.5375% due 3/3/97 4,166,139 $1,182,520 Harris Bank and Trust Eurodollar Time Deposit, 5.375% due 3/3/97 1,182,520 2,340,827 Merrimac Cash Fund Premium Class 2,340,827 $3,000,000 Prudential Securities Group Inc Master Note, 5.60% due 3/3/97 3,000,000 ------------ 12,092,600 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $13,217,589) 13,217,589 ------------
See accompanying notes to the financial statements. 9 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
DESCRIPTION VALUE ($) - ------------------------------------------------------------------------ TOTAL INVESTMENTS -- 104.8% (Cost $184,341,071) ** 243,821,578 ------------ Other Assets and Liabilities (net)--(4.8)% (11,238,354) ------------ TOTAL NET ASSETS -- 100% $232,583,224 ============ NOTES TO THE SCHEDULE OF INVESTMENTS: ADR -- American Depositary Receipt 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. (a)Represents investments of security lending collateral (Note 1). * Non-income producing security. ** The aggregate identified cost for federal income tax purposes is $184,521,015, resulting in gross unrealized appreciation and depreciation of $64,837,079 and $5,536,516, respectively, and net unrealized appreciation of $59,300,563.
See accompanying notes to the financial statements. 10 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $184,341,071) (Note 1) $243,821,578 Receivable for investments sold 711,905 Dividends and interest receivable 609,957 Receivable for expenses waived or borne by Manager (Note 2) 33,615 ------------ Total assets 245,177,055 ------------ LIABILITIES: Payable for investments purchased 295,700 Payable upon return of securities loaned (Note 1) 12,092,600 Payable to affiliate for (Note 2): Management fee 136,440 Shareholder service fee 27,288 Accrued expenses 41,803 ------------ Total liabilities 12,593,831 ------------ NET ASSETS $232,583,224 ============ NET ASSETS CONSIST OF: Paid-in-capital $162,849,002 Accumulated undistributed net investment income 938,206 Accumulated undistributed net realized gain 9,315,509 Net unrealized appreciation 59,480,507 ------------ $232,583,224 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $232,583,224 ============ SHARES OUTSTANDING: Class III 14,246,178 ============ NET ASSET VALUE PER SHARE: Class III $ 16.33 ============
See accompanying notes to the financial statements. 11 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $6,110) $ 6,026,703 Interest (including securities lending income of $20,828) 259,649 ----------- Total income 6,286,352 ----------- EXPENSES: Management fee (Note 2) 1,627,950 Audit fees 47,571 Custodian and transfer agent fees 41,247 Legal fees 10,176 Registration fees 1,528 Trustees fees (Note 2) 1,098 Miscellaneous 1,638 Fees waived or borne by Manager (Note 2) (347,372) ----------- 1,383,836 Shareholder service fee (Note 2) Class III 244,167 ----------- Net expenses 1,628,003 ----------- Net investment income 4,658,349 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on investments 18,434,364 Change in net unrealized appreciation (depreciation) on investments 17,227,189 ----------- Net realized and unrealized gain 35,661,553 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $40,319,902 ===========
See accompanying notes to the financial statements. 12 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, 1997 FEBRUARY 29, 1996 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 4,658,349 $ 5,198,684 Net realized gain 18,434,364 15,932,806 Change in net unrealized appreciation (depreciation) 17,227,189 30,653,753 ------------ ------------ Net increase in net assets resulting from operations 40,319,902 51,785,243 ------------ ------------ Distributions to shareholders from: Net investment income Class III (4,445,572) (5,212,954) ------------ ------------ Net realized gains Class III (17,043,498) (10,547,076) ------------ ------------ (21,489,070) (15,760,030) ------------ ------------ Net share transactions: (Note 5) Class III 1,324,046 (6,467,774) ------------ ------------ Increase (decrease) in net assets resulting from net share transactions 1,324,046 (6,467,774) ------------ ------------ Total increase in net assets 20,154,878 29,557,439 NET ASSETS: Beginning of period 212,428,346 182,870,907 ------------ ------------ End of period (including accumulated undistributed net investment income of $938,206 and $875,858, respectively) $232,583,224 $212,428,346 ============ ============
See accompanying notes to the financial statements. 13 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, ----------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- ------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.04 $ 12.54 $ 12.49 $ 11.71 $ 10.82 -------- -------- -------- -------- ------- Income from investment operations: Net investment income 0.33 0.37 0.34 0.27 0.30 Net realized and unrealized gain 2.53 3.26 0.55 1.64 1.32 -------- -------- -------- -------- ------- Total from investment operations 2.86 3.63 0.89 1.91 1.62 -------- -------- -------- -------- ------- Less distributions to shareholders: From net investment income (0.32) (0.37) (0.32) (0.28) (0.30) From net realized gains (1.25) (0.76) (0.52) (0.85) (0.43) -------- -------- -------- -------- ------- Total distributions (1.57) (1.13) (0.84) (1.13) (0.73) -------- -------- -------- -------- ------- NET ASSET VALUE, END OF PERIOD $ 16.33 $ 15.04 $ 12.54 $ 12.49 $ 11.71 ======== ======== ======== ======== ======= TOTAL RETURN(A) 20.03% 29.95% 7.75% 16.78% 15.66% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $232,583 $212,428 $182,871 $147,767 $62,339 Net expenses to average daily net assets 0.75% 0.75% 0.75% 0.75% 0.73% Net investment income to average daily net assets 2.15% 2.61% 2.84% 2.32% 2.77% Portfolio turnover rate 25% 34% 49% 65% 83% Average broker commission rate per equity share(b) $ .0590 N/A N/A N/A N/A 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 $ 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) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. See accompanying notes to the financial statements. 14 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 1.SIGNIFICANT ACCOUNTING POLICIES The 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 into classes. The Fund seeks long-term capital growth through investment primarily in equity securities. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. At February 28, 1997, Class III was the only active class of shares of the Fund. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with generally accepted accounting principles 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 investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 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. 15 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- SECURITY LENDING The Fund may lend its securities to certain member firms of the New York Stock Exchange. 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 28, 1997, the Fund loaned securities having a market value of $10,561,400, collateralized by cash in the amount of $12,092,600, 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for partnership interests and return of capital dividends. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules from generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ----------------- ------------------------ --------------- ($150,429) $150,428 $1
16 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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. 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. Amounts representing a return of capital are reflected as a reduction of cost. 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 in such manner as deemed equitable by the Trustees, 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 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 .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 as paid-in capital by the Fund. For the year ended February 28, 1997, the Fund received $150 in purchase premiums. There is no premium for cash 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 .75% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares, and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .60% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .75%; thus, the net annual expense ratio after the waiver for a Class III shareholder is unchanged. 17 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997 was $1,098. 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 28, 1997, aggregated $54,265,291 and $68,497,331, respectively. 4.PRINCIPAL SHAREHOLDERS At February 28, 1997, 95% 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 28, 1997 February 29, 1996 Class III: ------------------------ ------------------------ Shares Amount Shares Amount ---------- ------------ ---------- ------------ Shares sold 7,028 $ 107,000 616,745 $ 8,794,800 Shares issued to shareholders in reinvestment of distributions 1,161,012 17,805,046 825,614 11,508,937 Shares repurchased (1,045,307) (16,588,000) (1,900,841) (26,771,511) ---------- ------------ ---------- ------------ Net increase (decrease) 122,733 $ 1,324,046 (458,482) $ (6,467,774) ========== ============ ========== ============
18 GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION -- (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 64.16% of distributions as net capital gain dividends. 19 GMO FUNDAMENTAL VALUE FUND (A SERIES OF THE 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 Investing Environment The last year in general and the last six months in particular have witnessed very favorable condition for supporting improved stock prices. Inflation has remained at very low levels, helping to keep interest rates near twenty year lows, and most importantly corporate profitability which has been improving steadily from the recession of 1990 has reached levels (see chart) more like the 1960's. (ART) This is worth mentioning because the stock market was valued more frequently then at 16-18 times earnings than the 14-16 are we experienced in the last 10-15 years. The chart below shows the valuation differences in the periods of low inflation and good profitability. The important point here is to develop one's expectations of the future stock returns not so much on the level of the market but on the ability of corporations to maintain their very high profit ratios--return on sales or return on assets--relative to the past. 20 GMO FUNDAMENTAL VALUE FUND (A SERIES OF THE GMO TRUST) - -------------------------------------------------------------------------------- LOW INFLATION IS VERY POSITIVE FOR VALUATIONS
1960S 1970S 1980S 1990S LATEST ----- ----- ----- ----- ------ INFLATION--GDP DEFLATOR (Y/Y) High 4.7 9.4 9.3 4.3 Average 2.2 6.7 5.0 2.7 1.8 Low 1.2 4.2 2.6 1.8 S&P 500 P/E RATIO High 22.0 18.4 16.3 24.3 Average 17.6 12.1 12.2 20.1 20.8 Low 15.9 7.2 8.0 16.2 RETURN ON CAPITAL IN U.S. (IN %) High 14.2 14.9 17.3 18.5 Average 12.2 14.0 15.1 17.8 18.4 Low 9.2 12.8 12.6 16.6
Source: JP Morgan dated March 3, 1997 Today's robust profitability is a result of very significant attitude shifts on the part of today's corporate leaders. They have become exceedingly cost conscious, whether by downsizing, restructuring (consolidating manufacturing plants, administrative offices, etc.) or selling low return assets, and they have greatly improved returns as shown in the chart above. A lot of this should be thought of as a permanent improvement. Other elements such as the steadily declining wage costs and the lower dollar of the late 1980's and early 1990's have shifted direction and may negatively impact profit margins in the near future. (ART) 21 GMO FUNDAMENTAL VALUE FUND (A SERIES OF THE GMO TRUST) - -------------------------------------------------------------------------------- As a consequence we are less optimistic about the future growth in profits and worry that consensus opinions that were bolstered by the strong fourth quarter (year over year up more than 10%) are much too high. At the moment the market seems to be projecting earnings growth rates of 7-8%, a rate of growth that would be very unusual considering the six year improvement that has already occurred. Also important to understanding the market advance and to forecasting future returns are the money flows. The mutual fund investor has invested huge amounts in equity funds--about $240 billion last year. The inflows get invested immediately and are creating unusual volatility day-to-day or even intraday. (ART) We don't know what level of inflows is sustainable, but we know any significant contraction of funds from this source will be a problem for the market. Another important flow of money into stocks has resulted from the greatly improved profitability of corporations. Their cash flow has improved dramatically and their reluctance to significantly increase their investments has taken their free cash flow to record levels. 22 GMO FUNDAMENTAL VALUE FUND (A SERIES OF THE GMO TRUST) - -------------------------------------------------------------------------------- (ART) These flows have been used to repurchase their own stock as corporate executives believe their own company is one of their best investments if their own returns are rising. Furthermore, buying in stock produces "immediate" returns versus waiting for the payoff of a long term project. Reinforcing this is the fact that many executives' compensation is tied directly to stock prices through stock options. Corporations bought about $150 billion of their own stock in 1996 and seem to be running at an equivalent rate this year. These stock investments and the mutual fund inflows have given the market a tremendous boost but they must continue and even accelerate to keep the market advancing. Any slowdown and the long awaited correction may become a reality. Our concern about the sustainability of money flows as well as the possibility of an interruption of rising profit margins has encouraged us to try to reduce risk in the portfolio. We have done this by selling stocks that looked overpriced and investing defensively. Unfortunately in the short term this has had an unfavorable impact on relative performance. This has happened for a few reasons. The primary reason is size and momentum. Two years ago the largest companies were undervalued. We increased our exposure to that sector by adding stocks like Eli Lilly, Johnson & Johnson, GTE, General Electric, and DuPont. In hindsight we did not get enough into the large companies because they became the major investment theme of the last eighteen months. 23 GMO FUNDAMENTAL VALUE FUND (A SERIES OF THE GMO TRUST) - -------------------------------------------------------------------------------- More recently we concluded that the large stock category was overvalued. In the last twelve months the fifty largest (market capitalization) stocks outperformed the remaining 450 in the S&P 500 by more than 20%. This is enormous in historical terms. In addition our analysis suggests investors expect the 15 largest companies to grow at an average of 13% for the next ten years. This is almost twice the growth rate for the average corporation. We are skeptical that this is achievable. Our skepticism has encouraged us to take profits in most of these companies. However money managers today prefer to stick with companies that are meeting expectations and valuation is secondary. This is a problem for a long term, value oriented manager. Our valuation emphasis has encouraged us to shift money to a sector that we define as low expectation stocks. Most investors believe that Eli Lilly will grow earnings 17% for the next 10 years. They must deliver. We prefer situations where there is short term frustration and we can buy a good business or very good assets where improvements will produce very good rewards and disappointments will lead to only minor penalties. A short capsule of four situations we hope will give you an understanding of what we are doing in the portfolio. WMX Technology--This waste hauling company was a growth company in the 1980s. It tried to continue to grow in the 1990s by investing in lower return assets. As a consequence its return on assets declined from a peak of 17% to 5% in 1993. Growth investors liquidated their positions over the past five years in frustration. Finally provoked by investor criticism, management reassessed its businesses and today is making ROA its main priority. This has encouraged management to put up for sale $1.5 billion of assets and use a large part of the proceeds to repurchase stock. In addition a program has been instituted to cut costs which we think will boost profits by 10-15%. Investors remain skeptical in the short term due to some management turmoil (cultural changes are difficult), but the company is the biggest in its industry and with the right leadership could be the best. That should be worth a market multiple, a potential 25-30% return which we think has limited risk due to the low valuation and the 4% stock buyback this year which will likely be followed with more in 1998. H&R Block--This is a simple story. The company has a very good business in tax preparation (it owns its sector). With price increases and modest growth in customers, it can grow 10-12%/yr for the next five years. The company has almost no debt. Comparable companies sell at market multiples. H&R Block's valuation has been restrained by its investment in CompuServe, a computer on-line service. CompuServe has had profit difficulties due to the high cost of adding new subscribers. Since CompuServe became a public company a year ago, the problems have discouraged investors in H&R Block due to the uncertainty of how the CompuServe problem will be solved. We don't think this is the right focus. We think it is highly probable the CompuServe situation will be resolved in some way--sold, spun out to shareholders, or downsized--and if our residual value of CompuServe is correct, the remaining H&R Block is 20-25% undervalued. Added to this, we think a major stock repurchase will help us realize this potential. Owens-Corning--UNDERVALUED--The stock (March 24, 1997) is selling at $40. The company is forecasting earnings of $4.85/sh. Wall Street analysts are more pessimistic, predicting only $4.75/sh. European operations are sluggish and the higher dollar is hurting the translation of foreign profits. But, even if the company's expectations are too high, or Wall Street analysts miss the forecast, this company sells at the lowest multiple of any firm in the industrial products category. In the past, this has been justified because 24 GMO FUNDAMENTAL VALUE FUND (A SERIES OF THE GMO TRUST) - -------------------------------------------------------------------------------- of the large cost of asbestos litigation and settlements. However, the number of new asbestos claimants is plummeting and the cost per case is stable. The uncertainty that has penalized valuation should be lifting. Prior to the asbestos turmoil, this stock sold at close to a market multiple. A significant valuation change is possible. DIGITAL EQUIPMENT This company has: 1. $14 per in cash. 2. The world's fastest microprocessor. 3. Over 10% of all Windows NT certified engineers. 4. #5 in the rapidly growing networking business. 5. The largest multi-vendor computer service organization. Could these assets be undervalued? (ART) We have highlighted some of the stocks that we are currently enthusiastic about and will add to at today's prices and buy more enthusiastically at lower prices. We think stocks such as these will produce good returns and will have less risk in a market decline. To outperform in the future will also require limiting mistakes. You can see each day stocks of companies that failed to meet earnings expectations experience dramatic declines. We are trying to avoid these problems by getting more money into our highest confidence situations and reducing the number of stocks in the portfolio. We are also sticking with some of the stocks--such as 25 money center banks--that have done well. Our investment thesis is that these companies are undergoing a valuation change. They are delivering 10% earnings growth--growth that is above average--so the stocks should sell closer to market multiples. In summary, our investment view is this: The market is overvalued because growth expectations are too high. We are preparing for a market correction, probably precipitated by the recent increase in interest rates (the long bond is yielding close to 7%, up .7%) or Federal Reserve actions in March or May. The place to be in the decline will not be the very large companies that we think are also overvalued, but more eclectic choices profiled above. This has worked in the past and we think taking advantage of volatility will produce good relative returns over the next year. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co LLC Management. They are not meant as investment advice. 26 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 28, 1997 Average Annual Total Return
Since Inception 1 Year 5 Year 10/31/91 Class III 19.9% 17.8% 18.5%
[LINE GRAPH APPEARS HERE]
Date GMO Fundamental Value Fund S & P 500 Index 10/31/91 9,985 10,000 02/28/92 10,871 10,631 02/28/93 12,574 11,764 02/28/94 14,684 12,744 02/28/95 15,822 13,682 02/29/96 20,561 18,430 02/28/97 24,679 23,251
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. 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 paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Class I shares and Class II shares have not commenced operations. Past performance is not indicative of future performance. Information is unaudited. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 1997 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 (formerly GMO Core II Secondaries Fund) at February 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 10, 1997 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------- COMMON STOCKS -- 70.0% ADVERTISING -- 0.1% 1,300 Grey Advertising Inc 356,200 ------------ AEROSPACE -- 1.0% 5,100 Curtiss Wright Corp 267,750 21,600 Gencorp Inc 407,700 3,700 Hi Shear Industries Inc 8,788 86,200 Kaman Corp, Class A 1,185,250 19,100 Logicon Inc 721,025 11,000 Rohr Industries Inc * 199,375 7,800 Teleflex Inc 409,500 57,300 Thiokol Corp 3,194,474 ------------ 6,393,862 ------------ AUTOMOTIVE -- 1.2% 13,000 Bandag Inc 633,750 27,400 Borg Warner Automotive Inc 1,082,300 19,600 Breed Technologies Inc 428,750 24,100 Caliber Systems Inc 548,275 14,500 Cooper Tire & Rubber Co 288,188 14,000 Lear Corp 546,000 19,000 Mascotech Industries Inc 361,000 21,100 Modine Manufacturing Co 580,250 9,400 Paccar Inc 616,875 23,300 Smith (AO) Corp, Class B 783,463 4,000 SPX Corp 183,500 23,600 Superior Industries International Inc 566,400 53,500 Wabash National Corp 916,188 ------------ 7,534,939 ------------ BANKING AND FINANCIAL SERVICES -- 9.2% 4,800 Advanta Corp, Class A 198,600 11,700 Albank Financial Corp 410,963 24,750 Alex Brown Inc 1,438,593 18,300 Astoria Financial Corp 786,900 37,600 Baldwin and Lyons Inc, Class B 653,300 31,300 Bancorp Hawaii Inc 1,377,199 69,900 Banponce Corp 2,516,399 5,200 Capital One Financial Corp 206,700 10,100 CCB Financial Corp 693,113
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 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------ BANKING AND FINANCIAL SERVICES -- CONTINUED 35,200 Central Fidelity Banks Inc 1,025,200 16,600 Charter One Financial Inc 790,575 7,700 Cityscape Financial Corp 210,788 6,300 Coast Savings & Loan * 294,525 16,800 Collective Bancorp Inc 690,900 70,100 Comdisco Inc 2,181,862 65,100 Commerce Bancshares Inc 3,092,249 7,200 Commercial Federal Corp 258,300 24,200 Compass Bancshares Inc 1,079,925 1,336 Crestar Financial Corp 49,098 11,200 Dauphin Deposit Corp 474,600 20,500 Deposit Guaranty Corp 630,375 45,100 Dime Bancorp Inc * 789,250 22,510 Downey Financial Corp 531,799 14,000 Eaton Vance Corp 619,500 68,200 Edwards (AG) Inc 2,421,099 22,400 Financial Security Assurance Holdings Ltd 798,000 7,200 Finova Group Inc 549,900 10,100 First Citizens Bancshares, Class A 780,225 17,300 First Commerce Corp 717,950 3,700 First Empire State Corp 1,196,950 25,475 First Finance Corp 681,456 31,000 First Hawaiian Inc 1,030,750 8,125 First Midwest Bancorp Inc 256,953 17,700 First Security Corp 617,288 20,500 First Virginia Banks Inc 1,081,375 14,800 Fulton Financial Corp 370,000 63,200 Glendale Federal Savings Bank 1,682,699 21,700 Greenpoint Financial Corp 1,301,999 16,300 Interra Financial Inc 666,263 12,800 Jefferies Group Inc 564,800 8,300 Legg Mason Inc 369,350 23,100 Leucadia National Corp 615,038 11,600 Liberty Financial Cos 495,900 10,400 Long Island Bancorp Inc 380,900 8,900 Mark Twain Bancshares Inc 486,163 26,600 Mercantile Bankshares 987,525 18,950 Morgan Keegan Inc 352,944 600 National Bancorp of Alaska Inc 42,600
2 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------ BANKING AND FINANCIAL SERVICES -- CONTINUED 36,500 North American & Mortgage Co 743,688 11,300 Old Kent Financial Corp 566,413 5,400 Onbancorp Inc 240,975 13,600 One Valley Bancorp Inc 542,300 19,400 Peoples Bank Bridgeport 669,300 7,800 Peoples Heritage Finance Group Inc 244,725 35,200 Piper Jaffrey Inc 598,400 5,900 PMI Group Inc 323,025 14,000 Provident Bancorp Inc 521,500 44,270 Quick And Reilly Group 1,549,432 31,900 Raymond James Financial Corp 1,064,663 17,400 Riggs National Corp 346,913 15,000 Roosevelt Financial Group Inc 345,000 24,500 Rowe (T) & Price Associates Inc 1,081,063 80,500 Ryland Group Inc 1,016,313 42,200 Signet Banking Corp 1,339,849 51,480 Sovereign Bancorp Inc 649,935 14,875 St. Paul Bancorp Inc 394,188 29,800 Standard Federal Bancorp 1,717,224 11,700 Student Loan Group 472,388 1 Toronto Dominion Bank Ontario 9 20,800 Trustmark Corp 553,800 13,900 Union Planters Corp 622,025 8,100 Unionbancal Corp 488,025 14,100 United Asset Management Corp 380,700 11,500 United Carolina Bancshares Corp 501,688 46,500 United Cos Financial Corp 1,209,000 8,200 US Trust Corp 385,400 35,765 Washington Federal Inc 912,008 5,400 Washington Mutual, Inc 285,525 20,300 Wilmington Trust Corp 918,575 ------------ 60,132,889 ------------ CHEMICALS -- 0.8% 14,200 Arcadian Corp 370,975 13,000 Crompton & Knowles Corp 247,000 24,800 Cytec Industries Inc 982,700 11,700 Ferro Corp 368,550 7,900 Fuller (HB) Co 385,125
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 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------ CHEMICALS -- CONTINUED 13,300 Geon Co 285,950 52,000 Hanna (MA) Co 1,079,000 29,600 Kaiser Aluminum Corp * 370,000 13,200 Mississippi Chemical Corp 323,400 21,500 Schuller Corp 255,313 46,800 Wellman Inc 819,000 ------------ 5,487,013 ------------ COMMUNICATIONS -- 0.0% 9,800 DSC Communications Corp * 205,800 ------------ COMPUTER AND OFFICE EQUIPMENT -- 1.5% 87,400 Amdahl Corp * 863,075 11,500 Banctec Inc * 293,250 5,500 Dynatech Corp * 154,000 9,900 Everex Systems Inc(b) -- 56,600 Exabyte Corp 619,063 30,400 Intergraph Corp * 250,800 28,600 Lexmark International Group Inc 797,225 20,100 Micron Electronics Inc * 389,438 78,500 Quantum Corp * 3,120,374 21,500 Sequent Computer Inc * 369,531 8,800 Sterling Software Inc 251,900 24,900 Stratus Computer Inc 843,488 94,900 Unisys Corp * 640,575 21,400 Western Digital Corp 1,262,599 ------------ 9,855,318 ------------ CONSTRUCTION -- 1.1% 23,300 Bridge & Toll Road Brothers Inc * 451,438 25,800 Centex Corp 1,041,675 10,200 Foster Wheeler Corp 397,800 18,300 Granite Construction Inc 328,256 30,500 Horton (DR) Inc 381,250 45,300 Kaufman & Broad Home Corp 639,863 40,100 McDermott International Inc 892,225 16,900 MEMC Electronic Materials 414,050 29,500 Pulte Corp 1,006,688 130,300 Standard Pacific Corp 1,009,825
4 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------- CONSTRUCTION -- CONTINUED 7,300 Texas Industries Inc 425,225 ------------ 6,988,295 ------------ CONSUMER GOODS -- 3.1% 45,400 Alberto Culver Co, Class B 1,293,899 14,800 Bassett Furniture Industries Inc 366,300 48,800 Burlington Industries Inc 628,300 96,400 Callaway Golf Co 3,072,749 600 Carter Wallace Inc 8,625 28,900 Compucom Systems Inc 216,750 15,500 Department 56 Inc 279,000 19,400 Fastenal Co 703,250 400 First Brands Corp 9,950 44,100 Furniture Brands International Inc * 650,475 8,700 Johnson Worldwide Associates 110,925 24,800 Jones Apparel Group Inc 920,700 40,800 Justin Industries 474,300 3,000 K Swiss Inc, Class A 33,000 18,600 Kimball International, Class B 734,700 133,500 Kinetic Concepts Inc 1,985,812 16,000 La-z-boy Chair Co 554,000 26,510 Lancaster Colony Corp 1,212,833 29,200 Moore Corp Ltd 646,050 7,900 National Service Industries 300,200 44,510 Natures Sunshine Products Inc 684,341 7,700 Nine West Group Inc 361,900 1,700 Oil Dri America Class A 29,750 14,800 Paragon Trade Brands Inc 270,100 5,900 Polaroid Corp 249,275 20,700 Russell Corp 778,838 9,000 Safeguard Scientifics Inc 218,250 18,600 Safety Kleen 334,800 12,700 Sunbeam Corp 347,663 15,000 Technology Data Corp * 360,000 72,200 Terra Industries Inc 983,725 5,600 Timberland Co 226,800 21,400 Unifi Inc 682,125 13,300 US Industries Inc 487,113 ------------ 20,216,498 ------------
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 28, 1997
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------- ELECTRONIC EQUIPMENT -- 2.2% 48,700 American Power Conversion Corp * 1,016,613 5,200 Applied Magnetics Corp * 202,150 1,800 Aspect Telecommunications Corp 44,775 6,600 C-cube Microsystems Inc * 192,225 46,100 Cypress Semiconductor Corp * 610,825 22,400 Dallas Semiconductor Corp 582,400 10,000 Exide Corp 196,250 13,500 Federal Signal Corp 339,188 6,900 Franklin Electric Inc 331,200 10,600 Harman International Industries 483,625 2,160 HSN Inc 55,620 7,500 Hutchinson Technology Inc 240,938 46,000 Integrated Device Technology Inc * 506,000 13,600 Jabil Circuit Inc 450,500 19,100 Komag Inc * 573,000 9,000 Lattice Semiconductor Corp * 429,750 21,400 Marshall Industries * 708,875 4,700 Maxim Intergrated Products Inc * 233,238 19,900 Oak Technology Inc 268,650 73,000 Pioneer Standard Electrs Inc 1,022,000 4,600 Pittway Corp Class A 243,800 40,400 Read Rite Corp 1,239,775 16,200 SCI Systems Inc * 866,700 14,700 Sensormatic Electronics Corp 253,575 19,100 Silicon Valley Group Inc * 408,263 47,900 Stewart & Stevenson Services Corp 1,251,388 1 Thomas & Betts Corp 43 27,700 Vishay Intertechnology Inc 633,638 21,900 VLSI Technology 409,256 8,200 Wyle Electronics Inc 300,325 2,400 Zenith Electronics Corp * 23,100 21,900 Zilog Inc * 517,388 ------------ 14,635,073 ------------ FOOD AND BEVERAGE -- 2.4% 40,500 Bob Evans Farms Inc 551,813 47,000 Chiquita Brands International Inc 634,500 37,000 Coors (Adolph) Co 790,875 91,000 Darden Restaurants Inc 659,750 27,200 Dean Foods Co 887,400
6 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------- FOOD AND BEVERAGE -- CONTINUED 10,300 Dreyers Grand Ice Cream Inc 318,656 2,100 Farmer Brothers Co 315,000 17,900 Flowers Industries Inc 413,938 29,700 Great Atlantic & Pacific Tea Co 883,575 14,500 Hormel (Geo A) and Co 380,625 30,500 Hudson Foods Inc 533,750 40,500 International Multifoods Corp 855,563 19,300 Interstate Bakeries Corp 902,275 34,400 Luby's Cafeteria Inc 700,900 88,800 Michael Foods Inc 987,900 13,200 Quality Food Centers Inc * 483,450 71,500 Ryans Family Steak House * 527,313 51,600 Sanderson Farms Inc 870,750 700 Seaboard Corp 179,200 12,765 Smith Food and Drug Center, Class B 419,649 33,800 Smithfield Foods Inc * 1,309,749 1 Tootsie Roll Industries Inc 18 1,500 United Foods Inc Class B * 2,813 45,125 Universal Foods Corp 1,556,812 60,650 WLR Foods Inc 716,428 ------------ 15,882,702 ------------ HEALTH CARE -- 4.8% 8,600 Amerisource Health Corp 433,225 19,100 Apria Healthcare Group 341,413 53,300 Ballard Medical Products 1,046,013 14,800 Bard (CR) 405,150 33,300 Beckman Instruments Inc 1,381,949 27,900 Bergen Brunswig Corp, Class A 896,288 93,200 Beverly Enterprises Inc * 1,339,749 67,000 Bindley Western Industries Inc 1,281,374 31,600 BioMet Inc 481,900 63,900 Cognex Corp * 1,158,188 8,100 Dentsply International Inc 423,225 12,500 Diagnostic Products Corp 387,500 20,200 EG & G Inc 439,350 13,500 Electroglas Inc * 249,750 14,200 Foundation Health Corp * 536,050 100 Greenfield Industries Inc 2,188
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 28, 1997
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------- HEALTH CARE -- CONTINUED 28,900 Haemonetics Corp 498,525 12,100 Health Care & Retirement 328,213 15,400 Healthsource Inc * 321,475 7,300 Herbalife International Inc 153,300 41,000 Horizon CMS Healthcare Corp 671,375 28,700 Integrated Health Services Inc 853,825 6,000 KLA Instruments Corp * 250,125 135,700 Laboratory Corporation America Holdings 508,875 15,300 Lincare Holdings Inc * 659,813 11,000 Living Centers of America Inc 350,625 17,100 Marquette Medical Systems, Class A 324,900 10,000 Medimmune Inc 145,000 5,700 Mentor Corp 141,788 148,600 Mid Atlantic Medical Services Inc * 2,191,849 51,100 Nellcor Puritan Bennet Inc 887,863 63,500 Novacare Corp * 793,750 44,100 Perrigo Co * 534,713 15,000 Sierra Health Services Inc * 395,625 38,000 Sofamor Denek Group Inc * 1,505,749 48,400 Spacelabs Medical Inc 1,052,700 6,300 Steris Corp * 159,075 49,600 Sunrise Medical Inc * 669,600 13,800 Sybron International Corp * 410,550 10,700 Tektronix Inc 521,625 19,200 Tencor Instruments * 769,200 43,740 Tenet Healthcare Corp * 1,186,448 26,700 Teradyne, Inc * 727,575 11,900 United States Surgical Corp 507,238 11,600 Universal Health Services, Class B 395,850 26,700 Value Health Inc * 640,800 11,900 Varian Associates Inc 687,225 10,700 Vencor Inc * 370,488 28,800 Vital Sign Inc 712,800 6,978 Vitalink Pharmacy Services 147,410 ------------ 31,279,284 ------------ INSURANCE -- 8.9% 4,568 Alleghany Corp 974,697 18,700 Everest Re Holdings Inc 589,050
8 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------- INSURANCE -- CONTINUED 19,300 Allied Group Inc 646,550 58,900 Allmerica Property & Casualty 1,847,987 17,900 AMBAC Inc 1,194,825 27,800 American Bankers Insurance Group 1,532,474 27,500 American Financial Group Inc 1,031,250 16,149 American Heritage Life Investments 419,874 13,500 American National Insurance Co 1,113,750 31,800 APL Ltd 731,400 24,200 Argonaut Group Inc 695,750 100 Avemco Corp 2,375 18,900 Berkley (WR) Corp 970,988 15,500 Capital Re Corp 670,375 16,600 Capitol American Financial Corp 603,825 37,200 Citizens Corp 925,350 8,700 CMAC Investment Corp 304,500 36,000 Commerce Group Inc 949,500 117,569 Conseco Inc 4,614,582 30,500 Equitable of Iowa Cos 1,620,312 10,800 Foremost Corp of America 642,600 38,915 Fremont General Corp 1,123,671 13,800 Gallagher (Arthur J) and Co 424,350 700 Guaranty National Corp 12,513 16,300 Harleysville Group Inc 489,000 37,500 Health Systems International Inc, Class A 1,101,563 17,300 Home Beneficial Corp, Class B 657,400 25,400 Horace Mann Educators Corp 1,089,025 83,500 Integon Corp 1,075,063 32,200 John Alden Financial Corp 611,800 8,100 Kansas City Life Insurance Co 550,800 20,100 Liberty Corp 826,613 14,800 Life Re Corp 636,400 4,700 Markel Corp * 512,300 12,600 Mercury General Corp 773,325 14,800 NAC Re Corp 543,900 36,900 Ohio Casualty Corp 1,462,162 43,250 Old Republic International Corp 1,173,156 19,600 Orion Capital 1,254,400 4,424 Pacificare Health Systems, Class A * 353,920 13,904 Pacificare Health Systems, Class B 1,164,460 43,100 Paul Revere Corp 1,794,037
9 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 28, 1997
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------- INSURANCE -- CONTINUED 22,600 Penncorp Financial Group Inc 791,000 38,500 Presidential Life Corp 577,500 46,900 Protective Life Corp 2,016,699 53,100 Provident Cos Inc 2,893,949 16,200 Reinsurance Group of America 793,800 61,700 Reliance Group Holdings Inc 670,988 47,339 Reliastar Financial Corp 2,935,017 28,875 RLI Corp 996,188 22,000 Selective Insurance Group 924,000 16,700 TIG Holdings Inc 597,025 12,500 Transatlantic Holdings Inc 1,054,688 5,500 Trenwick Group Inc 270,875 13,700 Twentieth Century Industries 239,750 11,200 UICI * 330,400 10,400 USF & G Corp 234,000 50,175 USLIFE Corp 2,389,583 13,200 Washington National Corp 376,200 27,700 Western National Corp 637,100 7,700 Zurich Reinsurance Centre Inc 295,488 ------------ 58,736,122 ------------ MACHINERY -- 2.3% 49,300 Agco Corporation 1,398,887 9,700 Briggs & Stratton Corp 423,163 19,200 Cincinnati Milacron Inc 412,800 27,400 Coltec Industries Inc 500,050 3,300 Cooper Cameron Corp 216,150 29,900 Cummins Engine Inc 1,513,687 19,700 Donaldson Co Inc 662,413 19,300 Federal Mogul Corp 475,263 33,300 Giddings and Lewis Inc 459,956 5,400 Harnischfeger Industries Inc 236,925 150 Idex Corp 3,806 14,100 Kennametal Inc 578,100 18,700 Kulicke & Soffa Industries * 495,550 24,900 Lam Research Corp * 949,313 23,700 Mohawk Industries Inc * 625,088 10,500 Nordson Corp 588,000 12,900 Novellus System Inc * 1,054,575 31,000 Oakley Inc 275,125
10 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------- MACHINERY -- CONTINUED 61,800 Outboard Marine Corp 896,100 22,100 Starrett (LS) Co, Class A 660,238 31,600 Tecumseh Products Co, Class B 1,745,899 28,900 Toro Co 1,000,663 7,500 Ultratech Stepper Inc * 195,938 ------------ 15,367,689 ------------ MANUFACTURING -- 2.3% 33,000 ACX Technologies Inc * 631,125 8,100 Alliant Techsystems Inc 353,363 38,200 Amcast Industrial Corp 883,375 8,500 Applied Power Inc, Class A 332,563 31,600 Ball Corp 797,900 8,300 Barnes Group Inc 552,988 15,000 BW IP Inc 240,000 28,250 Clayton Homes Inc 402,563 36,700 Crane Co 1,197,338 10,500 CSS Industries Inc * 291,375 50 Donnelly Corp 850 15,400 Gibson Greetings Inc * 317,625 42,200 Global Industrial Technologies Inc 749,050 15,100 Greif Brothers Corp 456,775 12,800 Harsco Corp 460,800 19,400 International Game Technology 339,500 46,200 Lafarge Corp 1,074,150 24,800 Lydall Inc * 558,000 4,900 Mine Safety Appliances 285,425 21,200 Owens Illinois Inc 511,450 17,200 Standex International Corp 485,900 9,550 Tredegar Industries 383,194 51,300 Trinity Industries Inc 1,654,424 15,900 Trinova Corp 590,288 38,700 Watts Industries Inc, Class A 1,001,363 8,500 West Co Inc 236,938 ------------ 14,788,322 ------------ METALS AND MINING -- 1.0% 41,800 Allegheny Teledyne Inc 1,065,900 61,000 Asarco Inc 1,906,249 10,600 Cleveland Cliffs Inc 455,800
11 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 28, 1997
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------- METALS AND MINING -- CONTINUED 22,000 Commercial Metals Co 638,000 12,400 Nacco Inds Inc, Class A 672,700 12,700 Pittston Brinks Group 327,025 24,200 Timken Co 1,267,474 ------------ 6,333,148 ------------ OIL AND GAS -- 1.1% 14,000 El Paso Natural Gas Co 750,750 82,400 Enserch Corp 1,730,399 23,600 Equitable Resources Inc 699,150 4,800 Helmerich & Payne Inc 202,800 9,400 KCS Energy Inc 338,400 109,600 Noram Energy Corp 1,643,999 23,800 Oryx Energy Co * 476,000 7,800 Parker & Parsley Petroleum Co 230,100 6,900 Peoples Energy Corp 233,738 1,400 Piedmont Natural Gas Co 33,075 26,600 Santa Fe Energy Resources Inc * 342,475 13,600 Seagull Energy Corp * 249,900 12,800 Snyder Oil Corp 204,800 1 Southeastern Michigan Gas Enterprise 19 12,700 Union Texas Petroleum Holdings Inc 234,950 ------------ 7,370,555 ------------ PAPER AND ALLIED PRODUCTS -- 2.2% 55,100 Boise Cascade Corp 1,811,412 52,100 Bowater Inc 2,207,737 26,800 Chesapeake Corp 793,950 41,600 Fort Howard Corp 1,237,600 108,900 Gaylord Container, Class A 694,238 26,400 Longview Fibre Co 405,900 13,500 Media General Inc, Class A 405,000 16,100 Pentair Inc 505,138 41,000 Potlatch Corp 1,773,249 31,100 Rayonier Inc 1,181,800 35,800 Rock-tenn Co, Class A 707,050 17,100 Shorewood Packaging Corp * 299,250 87,500 Stone Container Corp 1,137,500
12 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------- PAPER AND ALLIED PRODUCTS -- CONTINUED 15,500 TJ International Inc 313,875 32,100 Zurn Industries Inc 822,563 ------------ 14,296,262 ------------ PHARMACEUTICALS -- 0.2% 20,700 ICN Pharmaceuticals Inc 522,675 42,700 Mark IV Industries Inc 992,775 ------------ 1,515,450 ------------ PRIMARY MATERIALS -- 0.7% 19,400 Ameron Inc 943,325 11,100 Carpenter Technology Corp 405,150 20,800 Martin Marietta Materials Inc 548,600 11,800 Medusa Corp 470,525 35,400 Premark International Inc 836,325 8,700 Southdown, Inc 311,025 25,300 USG Corp 891,825 ------------ 4,406,775 ------------ PRIMARY PROCESSING -- 1.8% 30,000 AK Steel Holding Corp 1,080,000 54,300 Alumax Inc 2,124,487 8,300 Belden Inc 295,688 113,800 Bethlehem Steel Corp * 938,850 34,600 Birmingham Steel Corp 627,125 54,600 Inland Steel Industries Inc 1,078,350 116,800 LTV Corp 1,459,999 48,900 Lukens Inc 910,763 6,800 Maxxam Inc * 327,250 6,700 Mueller Industries Inc * 288,938 8,800 NCH Corp 523,600 19,800 Oregon Steel Mills Inc 336,600 15,000 Quanex Corp 401,250 26,300 Rouge Steel Company, Class A 424,088 6,200 Valspar 354,950 149,000 WHX Corp 1,210,625 ------------ 12,382,563 ------------ PRINTING AND PUBLISHING -- 0.5% 54,200 American Business Products Inc 1,266,924 51,600 Hollinger International Inc 522,450
13 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 28, 1997
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------- PRINTING AND PUBLISHING -- CONTINUED 4,600 Plenum Publishing 154,675 17,999 Pulitzer Publishing Co 866,202 12,900 Wiley (John) and Sons, Class A 370,875 ------------ 3,181,126 ------------ REAL ESTATE -- 0.2% 38,800 Lennar Corp 979,700 20,000 Webb (D) Corp 322,500 ------------ 1,302,200 ------------ REFINING -- 1.1% 19,400 Ashland Coal Inc 497,125 29,100 Holly Corp 778,425 9,300 Lyondell Petro Chemical Co 219,713 114,300 Tosco Corp 3,186,112 55,092 Ultramar Diamond Shamrock Corp 1,680,305 34,200 Valero Energy Corp 1,077,300 ------------ 7,438,980 ------------ RETAIL TRADE -- 6.0% 17,400 AnnTaylor Stores Corp 348,000 17,200 Apogee Enterprises Inc 341,850 9,300 Barnes & Noble Inc 306,900 13,600 Bed, Bath & Beyond Inc 353,600 32,400 Best Buy Co Inc * 299,700 54,200 Blair Corp 982,375 13,300 Borders Group Inc 560,263 24,400 Brinker International Inc * 289,750 34,800 Brown Group Inc 565,500 15,800 Brunos Inc 231,075 46,500 Burlington Coat Factory Warehouse * 697,500 45,300 Casey's General Stores Inc 872,025 92,700 Cash American Investments Inc 880,650 82,100 Charming Shoppes Inc * 364,319 19,400 Claire's Stores Inc 274,025 20,000 CompUSA Inc 400,000 57,300 CPI Corp 1,052,888 3,500 Crown Books Corp 35,875 6,800 Dollar Tree Stores Inc 266,900 77,700 Dress Barn Inc * 1,330,612
14 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------- RETAIL TRADE -- CONTINUED 12,000 Eagle Hardware & Garden Inc * 234,000 4,700 Ethan Allen Interiors Inc 215,613 2,900 Fabri-Centers of America, Class A * 47,488 65,800 Family Dollar Stores Inc 1,554,524 58,300 Fingerhut Cos Inc 852,638 22,000 Fruit of the Loom Inc 899,250 22,070 General Host Corp 80,004 11,800 Goodys Family Clothing Inc * 213,875 35,800 Hannaford Brothers Co 1,275,374 24,400 Heilig Meyers Co 344,650 5,100 Hi-lo Automotive Inc 21,038 79,500 Ingles Markets Inc 1,192,500 2,400 Lillian Vernon Corp 30,000 49,400 Longs Drug Stores Corp 1,253,525 33,600 Macfrugals Bargains Close Outs Inc * 911,400 11,700 Mercantile Stores 561,600 77,900 Michaels Stores Inc 1,149,025 16,700 Micro Warehouse Inc * 240,063 2,500 National Presto Industry 94,063 26,000 Neiman Marcus Group Inc * 698,750 31,500 Officemax Inc 378,000 9,400 Outback Steakhouse Inc * 224,425 21,133 Penney (JC) Co Inc 1,040,790 37,000 Phillips Van Heusen 471,750 75,400 Pier 1 Imports Inc 1,310,074 11,000 Proffitts Inc 356,125 14,500 Revco (DS) Inc * 592,688 33,000 Richfood Holdings Inc 697,125 26,600 Ross Stores Inc 1,276,799 30,300 Ruddick Corp 484,800 121,900 Service Merchandise Co * 441,888 30,400 Shopko Stores Inc 475,000 14,800 Smart & Final Inc 320,050 220,000 Southland Corp * 756,250 72,600 Spiegel Inc, Class A * 490,050 32,800 Stanhome Inc 832,300 2,900 Stein Mart Inc * 68,875 33,000 The Vons Co Inc * 2,248,124 27,500 TJX Cos Inc 1,148,125
15 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 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------- RETAIL TRADE -- CONTINUED 47,500 Tyco Toys Inc * 534,375 8,400 Venture Stores Inc * 21,000 59,400 Waban Inc 1,700,324 16,100 Weismarkets Inc 483,000 20,200 Woolworth (FW) Co * 421,675 20,400 Zale Corp 377,400 ------------ 39,474,199 ------------ SERVICES -- 4.6% 71,700 Allwaste Inc * 439,163 13,200 Amerco 359,700 19,500 Anixter International Inc * 263,250 16,200 Aquarion Co 441,450 35,125 Arctic Cat Inc 338,078 37,400 Aztar Corp 275,825 37,150 Banta Corp 938,038 32,200 Belo (AH) Corp 1,215,550 22,700 Bowne and Co Inc 612,900 103,700 Buffetts Inc * 745,344 7,700 Catalina Marketing Corp 386,925 10,700 Chemed Corp 394,563 44,535 Chris Craft Industries Inc 1,831,494 44,000 Dames and Moore Inc 605,000 23,500 Data Broadcasting Corp 161,563 24,200 Devon Group Inc 695,750 68,000 Fleming Cos Inc 1,190,000 17,900 Franklin Quest Co 373,663 67,000 Grand Casinos Inc * 737,000 90,000 Handleman Co 787,500 21,800 Healthcare Compare Corp * 930,588 15,700 Interim Services Inc 592,675 30,800 International Dairy Queen Inc, Class A 662,200 3,425 International Shipholding Corp 59,938 17,400 Jacobs Engineering Group * 448,050 28,200 Kellwood Co 666,225 22,900 Kelly Services 629,750 28,100 Kingworld Productions Inc * 1,043,213 60,200 Lee Enterprises Inc 1,414,699 1,000 Morningstar Group Inc * 23,000
16 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------- SERVICES -- CONTINUED 40,600 Nash Finch Co 796,775 32,480 National Auto Credit Inc 324,800 30,800 Ogden Corp 627,550 25,800 Olsten Corp 461,175 41,900 PHH Corp 2,005,962 92,300 Physician Corp of America * 403,813 20,000 Primark Corp * 497,500 82,950 Rollins Inc 1,565,680 33,500 Rollins Truck Leasing Corp 469,000 18,000 Rykoff Sexton Inc 315,000 14,100 Sbarro Inc 366,600 24,800 Showboat Inc 508,400 37,200 Sizzler International Inc * 93,000 43,000 Spelling Entertainment Group Inc * 268,750 7,800 Stone & Webster Inc 280,800 46,100 Sun Healthcare Group Inc 633,875 11,000 Supervalu Inc 341,000 18,800 True North Communications Inc 376,000 100 Unifirst Corp 2,013 100 United Television Inc 9,000 21,948 United Water Resources Inc 392,321 ------------ 30,002,108 ------------ TECHNOLOGY -- 1.7% 125,500 Advanced Micro Devices Inc * 4,502,312 18,200 Autodesk Inc 616,525 5,000 BDM International Inc 210,000 11,200 Broderbund Software Inc * 329,000 35,500 Cirrus Logic Corp * 481,469 3,500 Compuware Corp 217,875 20,000 Data General Corp * 387,500 8,700 Fisher Scientific International Inc 393,675 12,800 G Technology Holdings Corp 401,600 16,800 Medaphis Corp * 166,950 11,400 SEI Investments Co 252,225 7,800 Solectron Corp * 412,425 43,700 Storage Technology Corp * 1,824,474 96,400 Tandem Computers Inc * 1,205,000 ------------ 11,401,030 ------------
17 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 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------ TELECOMMUNICATIONS -- 0.2% 50,400 Comsat Corp 1,322,999 ------------ TEXTILES -- 0.5% 4,200 Crystal Brands Inc *(b) -- 46,400 Interface Flooring Systems Inc 1,073,000 42,400 Shaw Industries 551,200 29,900 Springs Industries Inc, Class A 1,319,337 13,200 Westpoint Stevens Inc 455,400 ------------ 3,398,937 ------------ TRANSPORTATION -- 2.1% 22,800 Airborne Freight Corp 624,150 13,300 Airline Express International Corp 412,300 9,900 Alaska Airline Group Inc * 235,125 27,900 American West Holdings Corp, Class B 387,113 18,400 Arnold Industries Inc 255,300 14,900 Asa Holdings Inc 337,113 40,800 Comair Holdings Inc 841,500 71,000 Consolidated Freightways Inc 1,757,249 22,200 Fleetwood Enterprises Inc 577,200 27,600 Gatx Corp 1,352,399 17,800 Heartland Express Inc 373,800 41,200 Hunt (JB) Transportation Services Inc 571,650 26,500 Illinois Central Corp 910,938 122,800 Mesa Airline Group Inc * 782,850 55,600 Navistar International Corp * 535,150 11,400 Offshore Logistics Inc * 208,050 1,100 Omi Corp * 9,900 15,200 US Freightways Corp 366,700 109,200 USAir Group Inc * 2,156,699 23,600 Viad Corp 377,600 22,500 Werner Enterprises Inc 393,750 31,600 Yellow Corp * 493,750 ------------ 13,960,286 ------------ UTILITIES -- 5.2% 62,900 AES Corp * 4,112,087 58,600 American Water Works Co 1,369,774 40,300 Atlantic Energy Inc 690,138 62,600 Boston Edison Co 1,674,549
18 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------- UTILITIES -- CONTINUED 27,900 Brooklyn Union Natural Gas Co 795,150 5,800 Calenergy Inc * 193,575 198,900 Centerior Energy Corp 2,063,587 19,400 Central Hudson Gas & Electric 640,200 13,100 Central Louisiana Electric Inc 348,788 43,200 Central Maine Power Co 480,600 9,600 Cilcorp Inc 361,200 30,100 Commonwealth Energy Systems 673,488 37,500 Delmarva Power and Light Co 726,563 49,800 Destec Energy Inc 1,033,350 15,500 Eastern Enterprises 521,188 25,700 Eastern Utilities Associates 472,238 10,000 Energen Corp 300,000 14,200 Hawaiian Electric Industry Inc 498,775 22,700 LES Industries Inc 689,513 16,200 Mapco Inc 514,350 61,982 Midamerican Energy Holding Co 1,022,703 9,700 Minnesota Power & Light Co 271,600 36,900 Montana Power Co 807,188 46,900 Natural Gas Clearinghouse 926,275 21,200 Nevada Power Co 431,950 300 New Jersey Resources Corp 8,625 49,600 New York State Electric and Gas Corp 1,153,200 181,300 Niagara Mohawk Power Corp * 1,858,324 78,000 Northeast Utilities 809,250 3,800 Nui Corporation 79,800 10,100 Orange And Rockland Utilities 362,338 12,900 Portland General Electric Co 504,713 52,500 Public Services Co of New Mexico 964,688 22,800 Puget Sound Power and Light Co 578,550 52,300 Rochester Gas and Electric Corp 1,039,463 27,800 Sierra Pacific Resources 813,150 9,400 Sigcorp Inc 329,000 29,000 Southwest Natural Gas Corp 536,500 18,140 Tucson Electric Power Co 272,100 19,600 United Illuminating Co 570,850 32,700 Utilicorp United Inc 878,813 16,900 Washington Gas Light Co 373,913 19,100 Washington Water Power 350,963 29,000 Western Gas Resources Inc 540,125
19 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 28, 1997
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- UTILITIES -- CONTINUED 12,900 Western Resources Inc 390,225 15,000 Wisconsin Power & Light Holding Co 416,250 ------------ 34,449,669 ------------ TOTAL COMMON STOCKS (Cost $430,397,629) 460,096,293 ------------ RIGHTS AND WARRANTS -- 0.0% 550 American Satellite Network Warrants expire 06/30/99* (Cost $0) -- ------------ SHORT-TERM INVESTMENTS -- 15.0% REPURCHASE AGREEMENTS -- 9.5% $31,285,113 Prudential Securities, Inc. Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $31,297,549 and an effective yield of 4.77%, collateralized by U.S. Government and Agency Obligations with rates ranging from 0.0% to 8.00%, with maturity dates ranging from 12/03/01 to 2/01/27 and with an aggregate market value of $31,911,160. 31,285,113 $31,285,113 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $31,297,758 and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $31,944,694. 31,285,113 ------------ 62,570,226 ------------ U.S. GOVERNMENT -- 0.5% $ 2,950,000 U.S. Treasury Bill, 5.22% due 5/29/97(a) 2,913,851 ------------ CASH EQUIVALENTS -- 5.0%(C) 3,742,523 American AAdvantage Money Market Fund 3,742,523 $ 6,102,407 Bank of Boston Eurodollar Time Deposit, 5.5375% due 3/3/97 6,102,407 $ 3,189,047 Harris Bank and Trust Eurodollar Time Deposit, 5.375% due 3/3/97 3,189,047 18,577,623 Merrimac Cash Fund Premium Class 18,577,623 $ 1,000,000 Prudential Securities Group Inc Master Note, 5.60% due 3/3/97 1,000,000 ------------ 32,611,600 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $98,095,069) 98,095,677 ------------
20 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
VALUE ($) - ------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 85.0% (Cost $528,492,698) ** 558,191,970 Other Assets and Liabilities (net) -- 15.0% 98,572,043 -------------- TOTAL NET ASSETS -- 100% $ 656,764,013 ============== NOTES TO THE SCHEDULE OF INVESTMENTS: * Non-income producing security. (a) Security has been segregated to cover margin requirements on open financial futures contracts. (b) Bankrupt security -- valued by management (Note 1). ** The aggregate identified cost for federal income tax purposes is $529,402,370, resulting in gross unrealized appreciation and depreciation of $44,918,477 and $16,128,877, respectively, and net unrealized appreciation of $28,789,600. (c) Represents investments of security lending collateral (Note 1).
21 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $528,492,698) (Note 1) $558,191,970 Cash 92,036,693 Receivable for investments sold 15,973,984 Dividends and interest receivable 1,011,081 Receivable for variation margin on open futures contracts (Notes 1 and 6) 769,919 Receivable for expenses waived or borne by Manager (Note 2) 131,435 Receivable for Fund shares sold 36,000,000 ------------ Total assets 704,115,082 ------------ LIABILITIES: Payable for investments purchased 9,879,807 Payable upon return of securities loaned (Note 1) 32,611,600 Payable for Fund shares repurchased 4,469,000 Payable to affiliate for (Note 2): Management fee 243,217 Shareholder service fee 73,103 Accrued expenses 74,342 ------------ Total liabilities 47,351,069 ------------ NET ASSETS $656,764,013 ============ NET ASSETS CONSIST OF: Paid-in-capital $600,032,715 Accumulated undistributed net investment income 2,331,429 Accumulated undistributed net realized gain 26,700,127 Net unrealized appreciation 27,699,742 ------------ $656,764,013 ============ NET ASSETS ATTRIBUTABLE TO: Class I shares $ 1,391,447 ============ Class III shares $655,372,566 ============ SHARES OUTSTANDING: Class I 87,565 ============ Class III 41,234,772 ============ NET ASSET VALUE PER SHARE: Class I $ 15.89 ============ Class III $ 15.89 ============
22 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $271) $ 5,045,216 Interest (including securities lending income of $51,138) 5,218,734 ----------- Total income 10,263,950 ----------- EXPENSES: Management fee (Note 2) 1,948,526 Custodian and transfer agent fees 99,551 Audit fees 51,321 Registration fees 27,740 Legal fees 18,304 Trustees fees (Note 2) 1,725 Miscellaneous 2,829 Fees waived or borne by Manager (Note 2) (761,954) ----------- 1,388,042 Shareholder service fee (Note 2) Class I 606 Class III 482,110 ----------- Net expenses 1,870,758 ----------- Net investment income 8,393,192 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 43,765,541 Closed futures contracts 6,689,034 Closed swap contracts (2,237,125) ----------- Net realized gain 48,217,450 ----------- Change in net unrealized appreciation (depreciation) on: Investments 9,314,095 Open futures contracts (2,035,067) ----------- Net unrealized gain 7,279,028 ----------- Net realized and unrealized gain 55,496,478 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $63,889,670 ===========
23 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, 1997 FEBRUARY 29, 1996 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 8,393,192 $ 2,923,506 Net realized gain 48,217,450 35,136,350 Change in net unrealized appreciation (depreciation) 7,279,028 2,918,309 ------------ ------------ Net increase in net assets resulting from operations 63,889,670 40,978,165 ------------ ------------ Distributions to shareholders from: Net investment income Class III (6,723,900) (2,725,107) ------------ ------------ Net realized gains Class III (9,617,877) (38,332,108) ------------ ------------ (16,341,777) (41,057,215) ------------ ------------ Net share transactions: (Note 5) Class I 1,343,250 -- Class III 376,339,439 (4,168,166) ------------ ------------ Increase (decrease) in net assets resulting from net share transactions 377,682,689 (4,168,166) ------------ ------------ Total increase (decrease) in net assets 425,230,582 (4,247,216) NET ASSETS: Beginning of period 231,533,431 235,780,647 ------------ ------------ End of period (including accumulated undistributed net investment income of $2,331,429 and $686,982, respectively) $656,764,013 $231,533,431 ============ ============
24 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS I SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JANUARY 2, 1997 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ---------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $15.34 ------ Income from investment operations: Net investment income 0.05 Net realized and unrealized gain 0.50 ------ Total from investment operations 0.55 ------ NET ASSET VALUE, END OF PERIOD $15.89 ====== TOTAL RETURN(A) 3.52% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $1,391 Net expenses to average daily net assets 0.61%* Net investment income to average daily net assets 1.87%* Portfolio turnover rate 58% Average broker commission rate per equity share $.0271 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: (b)
(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 waived or borne by the Manager were less than $0.01 per share. *Annualized. 25 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, ------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 13.89 $ 13.61 $ 14.31 $ 12.68 $ 11.12 -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.28 0.23 0.20 0.21 0.22 Net realized and unrealized gain 2.32 3.20 0.34 2.14 1.59 -------- -------- -------- -------- -------- Total from investment operations 2.60 3.43 0.54 2.35 1.81 -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.27) (0.23) (0.20) (0.22) (0.21) From net realized gains (0.33) (2.92) (1.04) (0.50) (0.04) -------- -------- -------- -------- -------- Total distributions (0.60) (3.15) (1.24) (0.72) (0.25) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 15.89 $ 13.89 $ 13.61 $ 14.31 $ 12.68 ======== ======== ======== ======== ======== TOTAL RETURN(A) 19.12% 27.18% 4.48% 18.97% 16.46% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $655,373 $231,533 $235,781 $151,286 $102,232 Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48% 0.49% Net investment income to average daily net assets 2.15% 1.67% 1.55% 1.66% 2.02% Portfolio turnover rate 58% 135% 54% 30% 3% Average broker commission rate per equity share(b) $ .0271 N/A N/A N/A N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.03 $ 0.02 $ 0.01 $ 0.02 $ 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. (b) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. 26 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 1.SIGNIFICANT ACCOUNTING POLICIES The GMO Small Cap Value Fund (the "Fund"), formerly named the GMO Core II Secondaries 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 into classes. The Fund seeks long-term growth of capital through investment primarily in companies whose equity capitalization ranks in the lower two-thirds of the 1,800 companies with the largest equity capitalization whose securities are listed on a United States national securities exchange. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with generally accepted accounting principles 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 investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indicies. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a specified price 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. 27 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- Upon purchase of 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 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 held as of February 28, 1997. 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. SECURITY LENDING The Fund may lend its securities to certain member firms of the New York Stock Exchange. 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 28, 1997, the Fund loaned securities having a market value of $30,933,294, collateralized by cash in the amount of $32,611,600, 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 based on a notional amount. 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, 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 28 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 is 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 28, 1997. 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for partnership interests, return of capital dividends and redemptions in-kind. Gains associated with such in-kind redemptions amounted to $18,937,607. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules from generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid in Capital ----------------- ------------------------ --------------- ($24,845) ($16,120,442) $16,145,287
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. 29 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income 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 in such manner as deemed equitable by the Trustees, 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 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 and fee on redemptions of Fund shares is .50% of the amount invested or redeemed. Prior to June 1, 1996, the premium on cash purchases and fee on redemptions was .75% of the amount invested or redeemed. All purchase premiums and redemption fees are paid to and recorded as paid-in capital by the Fund. For the year ended February 28, 1997, the Fund received $3,055,202 in purchase premiums and $191,650 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 .50% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares, and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .33% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .48%; thus, the net annual expense ratio after the waiver for a Class III shareholder is unchanged. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997 was $1,725. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 30 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 3.PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short- term investments and in-kind transactions, for the year ended February 28, 1997, aggregated $465,555,595 and $172,108,038, respectively. 4.PRINCIPAL SHAREHOLDERS At February 28, 1997, 100% of the outstanding Class I shares of the Fund were held by one shareholder and 14% of the outstanding Class III shares of the Fund were held by one shareholder, each holding in excess of 10% of the outstanding shares of the respective class. 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 January 2, 1997 (commencement of operations) to February 28, 1997 Class I: ----------------------------- Shares Amount ----------------------------- Shares sold 87,565 $ 1,343,250 Shares issued to shareholders in reinvestment of distributions -- -- Shares repurchased -- -- ------------ ---------------- Net increase 87,565 $ 1,343,250 ============ ================
Year Ended Year Ended February 28, 1997 February 29, 1996 Class III: -------------------------- ------------------------- Shares Amount Shares Amount ----------- ------------- ---------- ------------- Shares sold 36,443,463 $ 557,963,243 5,303,210 $ 79,331,116 Shares issued to shareholders in reinvestment of distributions 846,111 12,460,382 2,682,509 35,880,229 Shares repurchased (12,721,369) (194,084,186) (8,664,888) (119,379,511) ----------- ------------- ---------- ------------- Net increase (decrease) 24,568,205 $ 376,339,439 (679,169) $ (4,168,166) =========== ============= ========== =============
31 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 6.FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 1997 is as follows: LONG FUTURES CONTRACTS
Number of Expiration Net Unrealized Contracts Type Date Contract Value Depreciation --------- ------------ ---------- -------------- -------------- 1030 Russell 2000 March 1997 $185,297,000 $(1,999,530)
At February 28, 1997, the Fund has sufficient cash and/or securities to cover any commitments or margin on open futures contracts. 32 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION -- (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 28.20% of distributions as net capital gain dividends. 33 GMO SMALL CAP VALUE FUND (FORMERLY THE GMO CORE II SECONDARIES FUND) (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Small Cap Value Fund (formerly the GMO Core II Secondaries Fund) returned 19.1% for the fiscal year ended February 28, 1997 as compared to 26.1% for the S&P 500. The combined Russell benchmark (the Russell 2500 through December 31, 1996 and the Russell 2000 Value Index thereafter), returned 17.6% for the fiscal year. Consistent with the Fund's investment objective and policies, the Fund was invested in common stocks throughout the period. Sector bets had a negative impact on performance for the year. During the year, the Fund was tilted toward defensive stocks and away from technology stocks, while defensive stocks underperformed the benchmark and technology stocks outperformed. Underweights in banks and energy stocks, which outperformed the index, also contributed negatively. The negative impact of industry sector bets was largely offset by the Fund's overweight in low price-to-book stocks, which strongly outperformed high price-to-book stocks for the year. The GMO Small Cap Value Fund selects stocks based on our three primary selection techniques -- value, momentum and neglect. Stock selection was quite positive for the year. Stocks in the best quartile of our proprietary dividend discount (value) model outperformed the index by a wide margin, while stocks not selected by our three investment styles underperformed the index. Since 1983, small capitalization stocks have lagged and today they look increasingly attractive relative to large capitalization stocks on a number of measures -- price-to-book, price-to-cash flow, price-to-sales and price- to-fair value. Although not as cheap as they were in the mid-1970's (prior to their legendary rise through 1983), today small-cap stocks are at their cheapest relative price since the late 1970's when institutions began to treat small-cap stocks as a separate asset class. We expect that small-cap stocks will outperform over a two-to-four year horizon. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co LLC Management. They are not meant as investment advice. 34 Comparison of Change in Value of a $10,000 Investment in GMO Small Cap Value Fund Class III shares and the S & P 500 Index As of February 28, 1997 Average Annual Total Return
Since Inception 1 Year 5 Year 12/31/91 Class III 17.9% 16.8% 18.6% 01/02/97 Class I n/a n/a 2.5% [LINE GRAPH APPEARS HERE] Date GMO Small Cap Value Fund S & P 500 Index 12/31/91 9,950 10,000 02/29/92 11,037 9,941 02/28/93 12,856 11,000 02/28/94 15,294 11,916 02/28/95 15,861 12,794 02/29/96 20,172 17,233 02/28/97 24,029 21,741
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. 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. Performance for Class I shares will be different due to lower shareholder service fees. Class II shares have not commenced operations. Past performance is not indicative of future performance. Information is unaudited. GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 1997 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 (formerly GMO U.S. Sector Allocation Fund) at February 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 10, 1997 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------- COMMON STOCKS -- 77.7% AEROSPACE -- 0.7% 18,200 Raytheon Co 857,675 12,800 TRW Inc 670,400 ------------ 1,528,075 ------------ AUTOMOTIVE -- 2.5% 400 Bandag Inc 19,500 42,400 Chrysler Corp 1,436,299 56,300 Ford Motor Co 1,850,862 31,900 General Motors Corp 1,846,212 5,200 Goodyear Tire & Rubber Co 274,300 7,300 Harley Davidson Inc 272,838 ------------ 5,700,011 ------------ BANKING AND FINANCIAL SERVICES -- 9.3% 17,800 Ahmanson (HF) & Co 732,025 1,700 American General Corp 73,738 5,600 Amsouth Bancorp 287,000 22,000 Bank of Boston Corp 1,658,249 21,800 Bank of New York Inc 844,750 9,800 Bankers Trust New York Corp 889,350 19,900 Barnett Banks Inc 920,375 14,825 Bear Stearns Inc 444,749 4,200 Beneficial Corp 290,325 36,344 Chase Manhattan Corp 3,638,942 5,100 Citicorp 595,425 1,700 Comdisco Inc 52,913 6,200 Countrywide Credit Industry Inc 180,575 19,000 Dean Witter Discover & Co 729,125 2,900 Edwards (AG) Inc 102,950 2,200 First Chicago NBD Corp 128,700 10,300 Fleet Financial Group Inc 628,300 3,700 Golden West Financial Corp 250,675 23,000 Great Western Financial Corp 1,009,124 3,700 Greenpoint Financial Corp 222,000 2,600 Household International Inc 251,875 6,300 Lehman Brothers Holding Inc 211,838 10,900 Mellon Bank Corp 876,088 7,100 Merrill Lynch 681,600 3,200 Morgan Stanley Group Inc 202,000
See accompanying notes to the financial statements. 1 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------ BANKING AND FINANCIAL SERVICES -- CONTINUED 2,500 Paine Webber Group Inc 81,563 38,200 PNC Bank Corp 1,618,724 17,000 Salomon Inc 945,625 4,700 Southern National Corp 182,713 4,100 Student Loan Marketing Association 434,088 7,600 Summit Bancorp 362,900 2,600 Sunamerica Inc 119,275 3,500 Synovus Financial Corp 122,063 18,330 Travelers Group Inc 982,946 9,700 US Bancorp 478,938 ------------ 21,231,526 ------------ CHEMICALS -- 0.6% 4,700 Eastman Chemical Co 259,088 13,700 Monsanto Co 498,338 1,100 Praxair Inc 53,488 12,800 Union Carbide Corp 604,800 ------------ 1,415,714 ------------ COMPUTER AND OFFICE EQUIPMENT -- 1.2% 20,400 Compaq Computer Corp * 1,616,699 12,950 Computer Associates International Inc 563,325 2,100 HBO & Co 121,013 1 NCR Corp 8 2,800 Pitney Bowes Inc 173,950 2,100 Reynolds & Reynolds Inc, Class A 58,800 3,200 Sterling Software Inc 91,600 1,800 Western Digital Corp 106,200 ------------ 2,731,595 ------------ CONSTRUCTION -- 0.1% 5,600 Home Depot Inc 305,200 ------------ CONSUMER GOODS -- 2.1% 13,200 Callaway Golf Co 420,750 5,600 Clorox Co 669,200 14,200 CVS Corp 656,750 1,500 Hasbro Inc 64,125 5,600 Liz Claiborne Inc 226,800 2,600 Newell Co 96,525 5,800 Nike Inc, Class B 416,875
2 See accompanying notes to the financial statements. GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------- CONSUMER GOODS -- CONTINUED 12,400 Procter and Gamble Co 1,489,549 6,600 Reebok International Ltd 308,550 5,100 VF Corp 354,450 ------------ 4,703,574 ------------ ELECTRONIC EQUIPMENT -- 0.3% 1,400 3 Com Corp * 46,353 3,400 Cooper Industries Inc 150,450 300 Hubbell Inc, Class B 12,713 2,500 Litton Industries * 107,500 600 Northern Telecom Ltd 43,125 1,400 Raychem Corp 119,175 8,800 Tellabs Inc 350,900 ------------ 830,216 ------------ ENVIRONMENTAL CONTROL -- 0.1% 9,000 Wheelabrator Technology Inc 128,250 ------------ FOOD AND BEVERAGE -- 5.5% 54,200 Anheuser Busch Cos Inc 2,411,899 41,898 Archer Daniels Midland Co 775,113 52,300 Coca Cola Co 3,190,299 5,600 Coca Cola Enterprises Inc 345,800 20,300 CPC International Inc 1,707,737 2,600 Dean Foods Co 84,825 2,700 Hormel (Geo A) and Co 70,875 8,700 IBP Inc 202,275 12,300 Pepsico Inc 404,363 1,800 RJR Nabisco Holdings Corp 65,925 27,400 Sara Lee Corp 1,061,749 7,600 Seagrams Co Ltd 296,400 8,900 Unilever ADR 1,695,449 600 Universal Foods Corp 20,700 7,700 Whitman Corp 180,950 800 Wrigley (William Jr) Co 47,900 ------------ 12,562,259 ------------ HEALTH CARE -- 1.3% 1,000 Becton Dickinson & Co 49,250 600 Cardinal Health Inc 36,900 1,300 Columbia HCA Healthcare Corp 54,600 2,600 Hillenbrand Industries Inc 97,825
See accompanying notes to the financial statements. 3 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------ HEALTH CARE -- CONTINUED 9,100 Johnson & Johnson 524,388 300 McKesson Corp 19,875 29,700 Pharmacia & Upjohn Inc 1,095,187 25,600 Tenet Healthcare Corp * 694,400 7,700 United States Surgical Corp 328,213 1,200 Wellpoint Health Network 51,450 ------------ 2,952,088 ------------ INSURANCE -- 3.4% 5,500 Aetna Life and Casualty Co 455,813 4,600 AFLAC Corp 185,725 9,900 Allstate Corp 627,413 2,700 AMBAC Inc 180,225 2,100 Cigna Corp 321,038 1,200 CNA Financial Corp * 133,500 23,200 Conseco Inc 910,600 7,600 Lincoln National Corp 441,750 11,100 Loews Corp 1,133,587 3,300 MBIA Inc 322,163 5,050 Old Republic International Corp 136,981 2,400 Progressive Corp 158,700 1,300 Provident Cos Inc 70,850 9,700 Providian Corp 541,988 100 Reliastar Financial Corp 6,200 10,500 Safeco Corp 438,375 12,300 Saint Paul Cos Inc 830,250 3,800 Torchmark Corp 223,725 6,100 Transamerica Corp 534,513 600 USLIFE Corp 28,575 ------------ 7,681,971 ------------ MACHINERY -- 0.2% 5,400 Baker Hughes Inc 191,700 3,000 FMC Corp * 206,250 ------------ 397,950 ------------ MANUFACTURING -- 2.9% 12,200 Corning Inc 459,025 26,400 General Electric Co 2,715,899 4,900 Gillette Co 387,713 12,300 IBM Corp 1,768,124
4 See accompanying notes to the financial statements. GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------- MANUFACTURING -- CONTINUED 8,900 International Game Technology 155,750 3,600 Leggett & Platt Inc 129,150 7,400 Temple Inland Inc 407,925 6,700 Tyco International Ltd 395,300 2,400 United Technologies Corp 180,600 ------------ 6,599,486 ------------ METALS AND MINING -- 0.2% 7,900 Allegheny Teledyne Inc 201,450 4,700 Phelps Dodge Corp 336,050 ------------ 537,500 ------------ OIL AND GAS -- 5.4% 8,800 Apache Corp 284,900 9,100 Atlantic Richfield Co 1,137,499 4,400 Burlington Resources Inc 193,050 11,600 Chevron Corp 748,200 11,700 Columbia Gas Systems Inc 687,375 2,600 Ensco International Inc * 112,775 14,500 Exxon Corp 1,448,187 200 FINA Inc, Class A 12,475 16,400 Global Marine Inc * 305,450 1,700 Mobil Corp 208,675 1,800 Noble Affiliates Inc 70,200 8,300 Noble Drilling Corp 147,325 1,000 Noram Energy Corp 15,000 9,300 Occidental Petroleum Corp 237,150 3,000 Oryx Energy Co * 60,000 3,800 Pennzoil Co 218,025 19,200 Phillips Petroleum Co 794,400 6,600 Royal Dutch Petroleum Co ADR 1,141,799 7,000 Schlumberger Ltd 704,375 18,300 Sonat Inc 841,800 20,900 Texaco Inc 2,066,487 20,700 Unocal Corp 799,538 2,800 USX--Marathon Group 74,550 ------------ 12,309,235 ------------ PAPER AND ALLIED PRODUCTS -- 0.8% 4,200 Champion International Corp 185,325 18,700 International Paper Co 780,725
See accompanying notes to the financial statements. 5 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------- PAPER AND ALLIED PRODUCTS -- CONTINUED 5,400 Mead Corp 314,550 3,500 Sonoco Products Co 91,875 11,600 Westvaco Corp 342,200 500 Willamette Industries Inc 32,000 ------------ 1,746,675 ------------ PHARMACEUTICALS -- 6.4% 50,100 Abbott Laboratories 2,818,124 700 Allergan Inc 23,800 27,500 American Home Products Corp 1,759,999 37,500 Bristol Myers Squibb Co 4,893,749 9,900 Lilly (Eli) & Co 865,013 17,700 Merck & Co Inc 1,628,399 6,300 Pfizer Inc 577,238 7,200 Schering Plough Corp 551,700 16,800 Warner Lambert Co 1,411,199 ------------ 14,529,221 ------------ PRIMARY MATERIALS -- 0.0% 400 Vulcan Materials Co 25,900 ------------ PRIMARY PROCESSING -- 0.1% 8,100 USX-US Steel Group Inc 254,138 ------------ REAL ESTATE -- 14.3% 3,300 Alexander Haagen Properties 49,500 3,800 Ambassador Apartments Inc 92,150 5,500 Amli Residential Properties Trust 130,625 5,800 Apartment Investment & Management Co, Class A 168,200 4,300 Arden Realty Group Inc 118,788 4,000 Associated Estates Realty Capital 94,000 8,700 Avalon Properties Inc 242,513 8,000 Bay Apartment Communities Inc 287,000 10,300 Berkshire Realty Co 119,738 8,600 Bradley Real Estate Inc 167,700 6,900 BRE Properties Inc 169,050 7,400 Burnham Pacific Properties Inc 108,225 22,800 Cali Realty Trust 729,600 8,600 Camden Property Trust 235,425 29,800 Carramerica Realty Corp 905,175 9,000 CBL & Associates Properties 223,875 13,700 Centerpoint Properties Corp 433,263
6 See accompanying notes to the financial statements. GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------- REAL ESTATE -- CONTINUED 5,106 Chateau Properties Inc 131,474 5,500 Chelsea GCA Realty Inc 187,688 8,600 Colonial Properties Trust 250,475 6,800 Columbus Realty Trust 141,950 13,000 Commercial Net Lease Realty 203,125 17,000 Cousins Properties Inc 414,375 20,700 Crescent Real Estate Equities 1,133,324 4,800 Crown American Realty Trust 37,800 6,900 Developers Diversified Realty Corp 252,713 23,600 Duke Realty Investments 946,950 14,200 Equity Inns Inc 191,700 29,500 Equity Residential Properties Trust 1,334,874 1,700 Essex Property Trust Inc Reit 51,000 7,500 Evans Withycombe Residential 153,750 5,200 Excel Realty Trust Inc 127,400 2,500 Factory Realty Trust Inc 16,563 14,100 Federal Realty Investment Trust 378,938 19,100 Felcor Suite Hotels Inc 647,013 19,000 First Industrial Reality Trust 567,625 26,100 Franchise Finance Corp of America 675,338 6,700 Gables Residential Trust 173,363 12,800 General Growth Properties 392,000 9,100 Glimcher Realty Trust 189,963 26,700 Highwood Properties Inc 921,150 2,500 Horizon Group Inc 32,813 14,100 Innkeepers USA Trust 197,400 15,100 IRT Property Co 169,875 9,700 Irvine Apartment Communities 261,900 6,400 JDN Realty Corp 184,000 8,000 JP Realty Inc 206,000 22,800 Kimco Realty Corp 766,650 14,400 Koger Equity Inc 257,400 3,400 Kranzco Realty Trust 54,825 4,900 Lexington Corporate Properties 63,088 23,200 Liberty Property Trust 551,000 9,700 Macerich Co 267,963 8,700 Manufactured Home Communities 197,925 1,700 Mark Centers Trust 19,338 14,900 Merry Land & Investment Co 322,213 4,600 MGI Properties Inc 100,050 2,800 Mid America Apartment Community 81,200
See accompanying notes to the financial statements. 7 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------- REAL ESTATE -- CONTINUED 7,800 Mills Corp 183,300 7,600 National Golf Properties Inc 248,900 16,400 New Plan Realty Trust 381,300 4,500 Oasis Residential Inc 104,063 3,800 Paragon Group Inc 65,550 14,300 Patriot American Hospitality 647,075 1,400 Pennsylvania Real Estate 32,025 8,700 Post Properties Inc 329,513 63,900 Public Storage Inc 1,717,312 2,500 Regency Realty Corp 68,438 14,900 RFS Hotel Investors Inc 253,300 4,100 Saul Centers Inc 69,700 56,500 Security Capital Industrial Trust 1,242,999 44,200 Security Capital Pacific Trust 1,038,699 15,700 Shurgard Storage Centers 439,600 41,200 Simon Debartolo Group Inc 1,241,149 3,700 Smith (Charles E) Residential 104,525 22,300 Spieker Properties Inc 811,163 24,300 Starwood Lodging Trust 950,738 7,300 Storage Trust Realty 196,188 14,700 Storage USA Inc 538,388 9,000 Summit Properties Inc 182,250 6,100 Sun Communities Inc 195,963 1,200 Tanger Factory Outlet Centers Inc 29,850 13,200 Taubman Centers Inc 173,250 2,000 Town & Country Trust 29,000 9,100 Trinet Corporate Realty Trust 310,538 43,924 United Dominion Realty Trust 658,860 9,300 Urban Shopping Centers Inc 291,788 16,900 Vornado Realty Trust 978,088 5,700 Walden Residential Properties Inc 146,775 9,600 Washington Realty Trust 171,600 9,600 Weeks Corp 321,600 14,300 Weingarten Realty 613,113 7,400 Wellsford Residential Properties 216,450 6,100 Western Investment Real Estate Trust 78,538 8,400 Winston Hotels Inc 112,350 ------------ 32,702,956 ------------
8 See accompanying notes to the financial statements. GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------ REFINING -- 0.1% 1,300 Murphy Oil Corp 60,288 5,700 Tosco Corp 158,888 ------------ 219,176 ------------ RETAIL TRADE -- 3.1% 21,700 Albertsons Inc 764,925 11,700 American Stores Co 523,575 26,300 Dayton Hudson Corp 1,104,599 12,000 Dillard Department Stores Inc 361,500 6,900 Fruit of the Loom Inc 282,038 11,500 Gap Inc 379,500 68,500 Kmart Corp * 856,250 6,300 May Department Stores Co 293,738 13,200 Penney (JC) Co Inc 650,100 10,100 Safeway Inc * 486,063 3,900 TJX Cos Inc 162,825 23,400 Toys R Us Inc * 608,400 20,700 Wal Mart Stores Inc 545,963 ------------ 7,019,476 ------------ SERVICES -- 0.1% 600 BHC Communications Inc, Class A 61,200 400 Circus Circus Enterprises Inc * 12,500 1,100 Equifax Inc 32,725 300 Fleming Cos Inc 5,250 700 Robert Half International Inc 29,138 5,300 Supervalu Inc 164,300 ------------ 305,113 ------------ TECHNOLOGY -- 4.8% 5,100 Advanced Micro Devices Inc * 182,963 4,100 Avnet Inc 256,250 2,600 Cabletron Systems Inc 78,000 15,300 Cisco Systems Inc * 851,063 11,500 Dell Computer Corp 817,938 1,500 Grainger (WW) Inc 118,875 24,600 Intel Corp 3,490,124 32,100 Microsoft Corp 3,129,749 12,600 Oracle Corp 494,550 500 Seagate Technology Corp 23,625
See accompanying notes to the financial statements. 9 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 15,800 Storage Technology Corp * 659,650 14,500 Xerox Corp 906,250 ------------ 11,009,037 ------------ TELECOMMUNICATIONS -- 3.6% 45,100 AT & T Corp 1,798,362 6,600 Bell Atlantic Corp 456,225 1,200 Bellsouth Corp 56,250 1,900 Cincinnati Bell Inc 117,800 15,300 GTE Corp 715,275 12,600 MCI Communications Corp 450,450 14,300 NYNEX Corp 736,450 47,800 Pacific Telesis Group 1,947,849 35,700 Sprint Corp 1,624,349 8,700 US West Inc 313,200 ------------ 8,216,210 ------------ TOBACCO -- 0.6% 10,000 Philip Morris Cos Inc 1,351,249 ------------ TRANSPORTATION -- 1.1% 22,900 Burlington Northern Santa Fe Railroad Co 1,906,424 7,600 CSX Corp 350,550 8,500 Ryder System Inc 267,750 ------------ 2,524,724 ------------ UTILITIES -- 6.9% 4,500 AES Corp * 294,188 13,100 Allegheny Power System Inc 401,188 19,300 American Electric Power Inc 805,775 20,000 Baltimore Gas and Electric Co 550,000 9,100 Carolina Power and Light Co 337,838 29,900 Central & South West Corp 728,813 25,000 Cinergy Corp 862,500 4,300 Citizens Utilities, Class B 51,063 11,300 CMS Energy Corp 370,075 5,500 Coastal Corp 250,250 4,200 Dominion Resources Inc 169,050 13,200 DPL Inc 325,050 9,700 DQE Inc 287,363 20,000 Duke Power Co 885,000 47,000 Edison International 1,010,499 5,000 Enova Corp 111,875 46,100 Entergy Corp 1,215,887
10 See accompanying notes to the financial statements. GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- UTILITIES -- CONTINUED 28,500 Houston Industries Inc 662,625 13,100 Illinova Corp 327,500 6,200 LG&E Energy Corp 153,450 15,500 Long Island Lighting Co 356,500 10,600 New York State Electric and Gas Corp 246,450 4,900 Northern States Power Co 233,363 27,000 Pacificorp 556,875 8,600 Portland General Electric Co 336,475 9,500 Potomac Electric Power Co 241,063 6,200 PP & L Resources Inc 141,825 5,100 Public Service of Colorado 198,900 6,500 Scana Corp 169,813 90,600 Southern Co 1,970,549 9,000 Teco Energy Inc 219,375 22,600 Texas Utilities Co 912,475 13,700 Wisconsin Energy Corp 351,063 ------------ 15,734,715 ------------ TOTAL COMMON STOCKS (COST $160,981,967) 177,253,240 ------------ SHORT-TERM INVESTMENTS -- 13.0% U.S. GOVERNMENT -- 0.3% $ 700,000 U.S. Treasury Bill, 5.22% due 5/29/97(a) 691,422 ------------ REPURCHASE AGREEMENTS -- 10.0% $11,421,973 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $11,426,589 and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $11,662,781. 11,421,973 $11,421,973 Prudential Securities, Inc Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $11,426,513 and an effective yield of 4.77%, collateralized by U.S. Government Agency Obligations with rates ranging from 6.30% to 6.75%, with maturity dates ranging from 5/24/01 to 12/03/01 and with an aggregate market value of $11,650,538. 11,421,973 ------------ 22,843,946 ------------
See accompanying notes to the financial statements. 11 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------- CASH EQUIVALENTS -- 2.7%(B) 892,837 American AAdvantage Money Market Fund 892,837 $ 2,691,219 Bank of Boston Eurodollar Time Deposit, 5.5375% due 3/3/97 2,691,219 2,556,944 Merrimac Cash Fund Premium Class 2,556,944 ------------- 6,141,000 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $29,676,126) 29,676,368 ------------- TOTAL INVESTMENTS -- 90.7% (Cost $190,658,093) ** 206,929,608 Other Assets and Liabilities (net) -- 9.3% 21,137,917 ------------- TOTAL NET ASSETS -- 100% $ 228,067,525 ============= NOTES TO THE SCHEDULE OF INVESTMENTS: ADR -- American Depositary Receipt * Non-income producing security. (a) Security has been segregated to cover margin requirements on open financial futures contracts. (b) Represents investments of security lending collateral (Note 1). ** The aggregate identified cost for federal income tax purposes is $190,928,233, resulting in gross unrealized appreciation and depreciation of $17,738,772 and $1,737,397, respectively, and net unrealized appreciation of $16,001,375.
12 See accompanying notes to the financial statements. GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $190,658,093) (Note 1) $ 206,929,608 Cash 27,222,103 Receivable for investments sold 2,292,340 Dividends and interest receivable 505,220 Receivable for variation margin on open futures contracts (Notes 1 and 6) 82,350 Receivable for expenses waived or borne by Manager (Note 2) 37,624 ------------- Total assets 237,069,245 ------------- LIABILITIES: Payable for investments purchased 1,974,041 Payable upon return of securities loaned (Note 1) 6,141,000 Payable to affiliate for (Note 2): Management fee 86,280 Shareholder service fee 26,548 Accrued expenses 55,740 Payable for open swap contracts (Notes 1 and 6) 718,111 ------------- Total liabilities 9,001,720 ------------- NET ASSETS $ 228,067,525 ============= NET ASSETS CONSIST OF: Paid-in-capital $ 164,450,814 Accumulated undistributed net investment income 1,418,165 Accumulated undistributed net realized gain 46,503,127 Net unrealized appreciation 15,695,419 ------------- $ 228,067,525 ============= NET ASSETS ATTRIBUTABLE TO: Class I shares $ 1,356,604 ============= Class III shares $ 226,710,921 ============= SHARES OUTSTANDING: Class I 104,149 ============= Class III 17,394,941 ============= NET ASSET VALUE PER SHARE: Class I $ 13.03 ============= Class III $ 13.03 =============
See accompanying notes to the financial statements. 13 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $13,644) $ 4,708,694 Interest (including securities lending income of $11,654) 1,038,804 ----------- Total income 5,747,498 ----------- EXPENSES: Management fee (Note 2) 1,138,768 Custodian and transfer agent fees 71,685 Audit fees 47,090 Registration fees 12,208 Legal fees 11,374 Trustees fees (Note 2) 1,185 Miscellaneous 2,389 Fees waived or borne by Manager (Note 2) (434,930) ----------- 849,769 Shareholder service fee (Note 2) Class I 1,688 Class III 264,906 ----------- Net expenses 1,116,363 ----------- Net investment income 4,631,135 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 62,135,280 Closed futures contracts 5,402,447 Closed swap contracts (1,867,196) ----------- Net realized gain 65,670,531 ----------- Change in net unrealized appreciation (depreciation) on: Investments (20,814,751) Open futures contracts 132,679 Open swap contracts (403,007) ----------- Net unrealized loss (21,085,079) ----------- Net realized and unrealized gain 44,585,452 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $49,216,587 ===========
14 See accompanying notes to the financial statements. GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, 1997 FEBRUARY 29, 1996 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 4,631,135 $ 5,252,390 Net realized gain 65,670,531 52,195,479 Change in net unrealized appreciation (depreciation) (21,085,079) 18,654,244 ------------ ------------ Net increase in net assets resulting from operations 49,216,587 76,102,113 ------------ ------------ Distributions to shareholders from: Net investment income Class I (8,397) -- Class III (3,967,362) (5,069,167) ------------ ------------ Total distributions from net investment income (3,975,759) (5,069,167) ------------ ------------ Net realized gains Class I (85,607) -- Class III (51,735,148) (19,784,233) ------------ ------------ Total distributions from net realized gains (51,820,755) (19,784,233) ------------ ------------ (55,796,514) (24,853,400) ------------ ------------ Net share transactions: (Note 5) Class I 1,245,516 -- Class III 22,083,220 (47,221,095) ------------ ------------ Increase (decrease) in net assets resulting from net share transactions 23,328,736 (47,221,095) ------------ ------------ Total increase in net assets 16,748,809 4,027,618 NET ASSETS: Beginning of period 211,318,716 207,291,098 ------------ ------------ End of period (including accumulated undistributed net investment income of $1,418,165 and $774,923, respectively) $228,067,525 $211,318,716 ============ ============
See accompanying notes to the financial statements. 15 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS I SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM SEPTEMBER 3, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ----------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $11.78 ------ Income from investment operations: Net investment income 0.12 Net realized and unrealized gain 2.10 ------ Total from investment operations 2.22 ------ Less distributions to shareholders: From net investment income (0.09) From net realized gains (0.88) ------ Total distributions (0.97) ------ NET ASSET VALUE, END OF PERIOD $13.03 ====== TOTAL RETURN (A) 19.25% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $1,357 Net expenses to average daily net assets 0.61%* Net investment income to average daily net assets 1.97%* Portfolio turnover rate 104% Average broker commission rate per equity share $.0270 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. 16 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, ----------------------------------------------- 1997 1996 1995 1994 1993 * ------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 13.63 $ 11.06 $ 11.26 $ 10.38 $ 10.00 ------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.26 0.29 0.28 0.29 0.05 Net realized and unrealized gain 2.20 3.90 0.49 1.21 0.33 ------- -------- -------- -------- -------- Total from investment operations 2.46 4.19 0.77 1.50 0.38 ------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.22) (0.29) (0.27) (0.30) -- From net realized gains (2.84) (1.33) (0.70) (0.32) -- ------- -------- -------- -------- -------- Total distributions (3.06) (1.62) (0.97) (0.62) -- ------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 13.03 $ 13.63 $ 11.06 $ 11.26 $ 10.38 ======= ======== ======== ======== ======== TOTAL RETURN (A) 20.88% 38.90% 7.56% 14.64% 3.80% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) 226,711 $211,319 $207,291 $167,028 $169,208 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 1.99% 2.27% 2.61% 2.56% 3.20%** Portfolio turnover rate 104% 84% 101% 53% 9% Average broker commission rate per equity share (b) $ .0270 N/A N/A N/A N/A 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 $ 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) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. * For the period from December 31, 1992 (commencement of operations) to February 28, 1993. ** Annualized. See accompanying notes to the financial statements. 17 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 1.SIGNIFICANT ACCOUNTING POLICIES The GMO U.S. Sector Fund (the "Fund"), formerly named the GMO U.S. Sector Allocation 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 into classes. The Fund seeks a total return greater than that of the Standard & Poor's 500 Stock Index through investment of substantially all of its assets in common stocks chosen from the Wilshire 5000 Index and primarily in common stocks chosen from among the 1,800 companies with the largest equity capitalization whose securities are listed on a United States national securities exchange. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among 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. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with generally accepted accounting principles 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 investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 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 specified price 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 18 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon purchase of 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 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 held as of February 28, 1997. 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. SECURITY LENDING The Fund may lend its securities to certain member firms of the New York Stock Exchange. 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 28, 1997, the Fund loaned securities having a market value of $5,948,663, collateralized by cash in the amount of $6,141,000, 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 based on a notional amount. 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, respectively. Equity swaps are marked to market daily based upon quotations from market makers and the change, if any, is 19 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 is 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 28, 1997. 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for return of capital dividends. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules from generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ------------------ ------------------------- --------------- $(12,134) $12,134 --
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. The Fund's investments in REIT equity securities may at times result in the Fund's receipt of cash in excess of the REIT's earnings. The excess amount cannot be determined by the Fund at the time of receipt. If the 20 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 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 in such manner as deemed equitable by the Trustees, 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 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. Prior to June 1, 1996, the premium on cash purchases was .17% of the amount invested. All purchase premiums are paid to and recorded as paid-in capital by the Fund. For the year ended February 28, 1997, the Fund received $69,616 in purchase premiums. There is no premium for cash 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 .49% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares, and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .33% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .48%; thus, the net annual expense ratio after the waiver for a Class III shareholder is unchanged. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1997 was $1,185. 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 28, 1997, aggregated $216,293,363 and $334,403,664, respectively. 21 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 4.PRINCIPAL SHAREHOLDERS At February 28, 1997, 100% of the outstanding Class I shares of the Fund were held by one shareholder and 85% of the outstanding Class III shares of the Fund were held by three shareholders, each holding in excess of 10% of the outstanding shares of the respective Class. 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 September 3, 1996 (commencement of operations) to February 28, 1997 Class I: ------------------------------ Shares Amount ------------------------------ Shares sold 97,467 $ 1,163,513 Shares issued to shareholders in reinvestment of distributions 7,610 94,003 Shares repurchased (928) (12,000) ------------ ---------------- Net increase 104,149 $ 1,245,516 ============ ================
Year Ended Year Ended February 28, 1997 February 29, 1996 Class III: ------------------------ ------------------------- Shares Amount Shares Amount ---------- ------------ ---------- ------------- Shares sold 7,570,612 $ 96,850,986 1,735,802 $ 23,582,604 Shares issued to shareholders in reinvestment of distributions 3,069,555 37,653,043 767,911 10,007,238 Shares repurchased (8,749,092) (112,420,809) (5,734,152) (80,810,937) ---------- ------------ ---------- ------------- Net increase (decrease) 1,891,075 $ 22,083,220 (3,230,439) $ (47,221,095) ========== ============ ========== =============
6.FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 1997 is as follows: LONG FUTURES CONTRACTS
Net Unrealized Number of Expiration Appreciation Contracts Type Date Contract Value (Depreciation) ---------- ------------ ---------- -------------- -------------- 108 Russell 2000 March 1997 $19,429,200 $204,037 9 S&P 500 March 1997 3,556,800 (62,022) -------- $142,015 ========
22 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- At February 28, 1997, the Fund has sufficient cash and/or securities to cover any commitments or margin on open futures contracts. SWAP AGREEMENTS
Unrealized Notional Amount Expiration Appreciation Fund/Counterparty Date Description (Depreciation) ----------------- ---------- --------------------------------- -------------- $ 7,438,853/ 5/16/97 Agreement with Morgan Stanley $ 21,088 7,132,312 Capital Services, Inc. dated May 20, 1996 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 6 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 6 month LIBOR adjusted by a specified spread. 12,990,744/ 9/11/97 Agreement with Morgan Stanley (739,199) 13,014,462 Capital Services, Inc. dated September 9, 1996 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 6 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 6 month LIBOR adjusted by a specified spread. --------- Net unrealized depreciation $(718,111) =========
23 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) FEDERAL INCOME TAX INFORMATION -- (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 74.94% of distributions as net capital gain dividends. 24 [THIS PAGE INTENTIONALLY LEFT BLANK] 25 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager at Grantham, Mayo, Van Otterloo & Co., LLC for more than fifteen years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO U.S. Sector Fund returned 20.9% for the fiscal year ended February 28, 1997, as compared to 26.1% for the S&P 500. Consistent with the Fund's investment objective and policies, the Fund was invested substantially in common stocks throughout the period. During the year, the Fund's strategy was similar to that of the GMO Core Fund, however, the Fund is structured to provide investors with the ability to benefit from investment in and among core, growth, value, REIT (real estate investment trust), and small capitalization strategies when the sectors appear attractively priced. The majority of the Fund's performance shortfall was due to three sector strategies which underperformed for the year. The first of these strategies involved underweighting banks and overweighting utilities, a strategy which was based upon our view that utility stocks are significantly undervalued relative to their historical levels, and that banks, which are in the sixth year of a rally off their 1990 lows, are overvalued. Historically both sectors have underperformed in periods of rising interest rates and the strategy was expected to have a neutral impact if rates did in fact increase. This year, however, banks moved up and utilities moved down relative to the market in an environment of rising interest rates. Therefore, rather than having the neutralizing effect that was intended, both strategies hurt the performance of the Fund. The second sector strategy, overweighting defensive stocks and underweighting cyclical stocks, also impacted performance negatively, primarily during the rally of cyclical stocks in the early part of the year. Last, our underweight position in the largest 100 industrials hurt relative performance in an environment where the largest capitalization stocks carried the market, significantly outperforming smaller industrial stocks for the year. In addition to the aforementioned sector bets, the three GMO stock selection parameters -- value, momentum and neglect -- had mixed results for the year. Relative to the S&P 500, our dividend discount model provided positive contributions to return while the momentum and neglect models both experienced negative value-added versus the index. OUTLOOK In December the Fund allocated 20% to small capitalization stocks and 15% to REITs (real estate investment trusts), based upon the attractive valuations of these sectors relative to large capitalization U.S. equities. Additionally, the core portion of the Fund is tilted primarily towards the value style, based upon the relative attractiveness of large-cap value stocks. Although the impact of the small-cap and REIT allocations has been slightly negative in the first two months of 1997, we think the fundamentals are positive for both groups to outperform over the short to medium term. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management. They are not meant as investment advice. 26 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 28, 1997 Average Annual Total Return
Since Inception 1 Year 5 Year 12/31/92 Class III 20.7% n/a 20.1% 09/03/96 Class I n/a n/a 19.1%
[Line Graph Appears Here]
Date GMO U.S. Sector Fund S & P 500 Index 12/31/92 9,986 10,000 02/28/93 10,362 10,221 02/28/94 11,879 11,072 02/28/95 12,777 11,887 02/29/96 17,748 16,012 02/28/97 21,454 20,201
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. 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 paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Performance for Class I shares will be different due to higher shareholder service fees. Class II shares have not commenced operations. Past performance is not indicative of future performance. Information is unaudited. GMO REIT FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the period from May 31, 1996 (commencement of operations) to February 28, 1997, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian and brokers, provides a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 10, 1997 GMO REIT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- CONTINUED (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------ REAL ESTATE INVESTMENT TRUSTS -- 97.0% APARTMENTS -- 20.5% 29,600 Ambassador Apartments Inc 717,800 45,100 AMLI Residential Properties Trust 1,071,125 44,800 Apartment Investment & Management Co, Class A 1,299,200 35,300 Associated Estates Realty Capital 829,550 73,600 Avalon Properties Inc 2,051,600 58,500 Bay Apartment Communities Inc 2,098,688 87,600 Berkshire Realty Co 1,018,350 44,700 BRE Properties Inc 1,095,150 72,600 Camden Property Trust 1,987,425 56,500 Columbus Realty Trust 1,179,438 216,800 Equity Residential Properties Trust 9,810,199 64,100 Evans Withycombe Residential 1,314,050 54,900 Gables Residential Trust 1,420,538 77,700 Irvine Apartment Communities 2,097,900 123,300 Merry Land & Investment Co 2,666,363 21,300 Mid America Apartment Community 617,700 35,000 Oasis Residential Inc 809,375 29,000 Paragon Group Inc 500,250 68,100 Post Properties Inc 2,579,288 343,000 Security Capital Pacific Trust 8,060,499 15,500 Smith (Charles E) Residential 437,875 76,300 Summit Properties Inc 1,545,075 16,100 Town & Country Trust 233,450 335,314 United Dominion Realty Trust 5,029,710 44,400 Walden Residential Properties Inc 1,143,300 61,200 Wellsford Residential Properties 1,790,100 ---------- 53,403,998 ---------- DIVERSIFIED -- 3.1% 68,900 Colonial Properties Trust 2,006,713 130,900 Cousins Properties Inc 3,190,688 3,100 First Union Real Estate 41,075 37,800 Lexington Corporate Properties 486,675 34,200 MGI Properties Inc 743,850 9,000 Pennsylvania Real Estate 205,875 79,000 Washington Realty Trust 1,412,125 ---------- 8,087,001 ----------
1 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 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------ ENCLOSED MALLS -- 10.1% 75,400 CBL & Associates Properties 1,875,575 58,600 Crown American Realty Trust 461,475 119,400 General Growth Properties 3,656,625 71,000 JP Realty Inc 1,828,250 91,700 Macerich Co 2,533,213 71,400 Mills Corp 1,677,900 328,800 Simon Debartolo Group Inc 9,905,099 132,000 Taubman Centers Inc 1,732,500 86,900 Urban Shopping Centers Inc 2,726,488 ---------- 26,397,125 ---------- FACTORY OUTLET -- 0.7% 45,100 Chelsea GCA Realty Inc 1,539,038 17,500 Factory Realty Trust Inc 115,938 2,100 Horizon Group Inc 27,563 900 Prime Retail Inc 11,588 9,400 Tanger Factory Outlet Centers Inc 233,825 ---------- 1,927,952 ---------- HOTEL/MOTEL -- 9.8% 30,000 American General Hospitality 821,250 100,600 Equity Inns Inc 1,358,100 131,600 Felcor Suite Hotels Inc 4,457,950 173,300 Franchise Finance Corp of America 4,484,138 11,182 Homestead Village 85,260 97,700 Innkeepers USA Trust 1,367,800 97,900 Patriot American Hospitality 4,429,975 98,700 RFS Hotel Investors Inc 1,677,900 152,100 Starwood Lodging Trust 5,950,912 62,100 Winston Hotels Inc 830,588 ---------- 25,463,873 ---------- INDUSTRIAL -- 15.2% 95,900 Centerpoint Properties Corp 3,032,838 178,500 Duke Realty Investments 7,162,312 149,100 First Industrial Realty Trust 4,454,363 181,100 Liberty Property Trust 4,301,125 465,975 Security Capital Industrial Trust 10,251,449 143,500 Spieker Properties Inc 5,219,812
2 See accompanying notes to the financial statements. GMO REIT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------- INDUSTRIAL -- CONTINUED 80,900 Trinet Corporate Realty Trust 2,760,713 74,700 Weeks Corp 2,502,450 ---------- 39,685,062 ---------- MANUFACTURED HOUSING -- 1.7% 52,475 Chateau Properties Inc 1,351,226 70,800 Manufactured Home Communities 1,610,700 46,500 Sun Communities Inc 1,493,813 ---------- 4,455,739 ---------- OFFICE -- 11.8% 14,800 Arden Realty Group Inc 408,850 171,700 Cali Realty Trust 5,494,399 224,100 Carramerica Realty Corp 6,807,037 160,600 Crescent Real Estate Equities 8,792,849 211,100 Highwood Properties Inc 7,282,949 113,100 Koger Equity Inc 2,021,663 ---------- 30,807,747 ---------- RECREATION -- 0.8% 66,300 National Golf Properties Inc 2,171,325 ---------- SELF STORAGE -- 7.0% 385,300 Public Storage Inc 10,354,937 101,800 Shurgard Storage Centers 2,850,400 50,800 Storage Trust Realty 1,365,250 100,100 Storage USA Inc 3,666,163 ---------- 18,236,750 ---------- SHOPPING/POWER CENTER -- 16.3% 34,700 Alexander Haagen Properties 520,500 72,800 Bradley Real Estate Inc 1,419,600 70,100 Burnham Pacific Properties Inc 1,025,213 103,400 Commercial Net Lease Realty 1,615,625 60,500 Developers Diversified Realty Corp 2,215,813 10,100 Essex Property Trust Inc 303,000 51,200 Excel Realty Trust Inc 1,254,400 130,800 Federal Realty Investment Trust 3,515,250 85,300 Glimcher Realty Trust 1,780,638 130,400 IRT Property Co 1,467,000 57,000 JDN Realty Corp 1,638,750
3 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 28, 1997
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------- SHOPPING/POWER CENTER -- CONTINUED 192,000 Kimco Realty Corp 6,455,999 35,300 Kranzco Realty Trust 569,213 14,800 Mark Centers Trust 168,350 149,800 New Plan Realty Trust 3,482,850 14,900 Regency Realty Corp 407,888 41,400 Saul Centers Inc 703,800 136,000 Vornado Realty Trust 7,870,999 122,400 Weingarten Realty 5,247,899 60,200 Western Investment Real Estate Trust 775,075 ------------ 42,437,862 ------------ TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $231,047,219) 253,074,434 ------------ SHORT-TERM INVESTMENTS -- 5.4% CASH EQUIVALENTS -- 2.3%(B) 684,226 American AAdvantage Money Market Fund 684,226 $4,706,125 Bank of Boston Eurodollar Time Deposit, 5.5375% due 3/3/97 4,706,125 $ 584,249 Harris Bank and Trust Eurodollar Time Deposit, 5.375% due 3/3/97 584,249 ------------ 5,974,600 ------------ U.S. GOVERNMENT -- 0.1% $ 300,000 U.S. Treasury Bill, 5.22% due 5/29/97(a) 296,324 ------------ REPURCHASE AGREEMENTS -- 3.0% $7,794,361 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $7,797,511 and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $7,958,689. 7,794,361 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $14,065,139) 14,065,285 ------------ TOTAL INVESTMENTS -- 102.4% (Cost $245,112,358) * 267,139,719 Other Assets and Liabilities (net) -- (2.4)% (6,169,415) ------------ TOTAL NET ASSETS -- 100% $260,970,304 ============
4 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 28, 1997
NOTES TO THE SCHEDULE OF INVESTMENTS: (a) Security has been segregated to cover margin requirements on open financial futures contracts. (b) Represents investments of security lending collateral (Note 1). * The aggregate identified cost for federal income tax purposes is $245,179,966, resulting in gross unrealized appreciation and depreciation of $22,411,425 and $451,672, respectively, and net unrealized appreciation of $21,959,753.
5 See accompanying notes to the financial statements. GMO REIT FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $245,112,358) (Note 1) $267,139,719 Dividends and interest receivable 422,521 Receivable for expenses waived or borne by Manager (Note 2) 65,828 ------------ Total assets 267,628,068 ------------ LIABILITIES: Payable upon return of securities loaned (Note 1) 5,974,600 Payable for Fund shares repurchased 431,210 Payable to affiliate for (Note 2): Management fee 150,321 Shareholder service fee 30,063 Accrued expenses 54,770 Payable for variation margin on open futures contracts (Notes 1 and 6) 16,800 ------------ Total liabilities 6,657,764 ------------ NET ASSETS $260,970,304 ============ NET ASSETS CONSIST OF: Paid-in-capital $233,875,136 Accumulated undistributed net investment income 1,209,863 Accumulated undistributed net realized gain 3,552,016 Net unrealized appreciation 22,333,289 ------------ $260,970,304 ============ NET ASSETS ATTRIBUTABLE TO: Class I shares $ 41,454 ============ Class III shares $260,928,850 ============ SHARES OUTSTANDING: Class I 3,284 ============ Class III 20,672,613 ============ NET ASSET VALUE PER SHARE: Class I $ 12.62 ============ Class III $ 12.62 ============
6 See accompanying notes to the financial statements. GMO REIT FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- PERIOD FROM MAY 31, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 4,441,984 Interest (including securities lending income of $2,726) 365,858 ----------- Total income 4,807,842 ----------- EXPENSES: Management fee (Note 2) 666,973 Audit fees 36,130 Custodian and transfer agent fees 29,569 Registration fees 27,656 Legal fees 3,020 Trustees fees (Note 2) 305 Miscellaneous 936 Fees waived or borne by Manager (Note 2) (286,384) ----------- 478,205 Shareholder service fee (Note 2) Class I 9 Class III 133,386 ----------- Net expenses 611,600 ----------- Net investment income 4,196,242 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 3,021,872 Closed futures contracts 1,217,163 ----------- Net realized gain 4,239,035 ----------- Change in net unrealized appreciation (depreciation) on: Investments 22,027,361 Open futures contracts 305,928 ----------- Net unrealized gain 22,333,289 ----------- Net realized and unrealized gain 26,572,324 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $30,768,566 ===========
7 See accompanying notes to the financial statements. GMO REIT FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD FROM MAY 31, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ---------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 4,196,242 Net realized gain 4,239,035 Change in net unrealized appreciation (depreciation) 22,333,289 ------------ Net increase in net assets resulting from operations 30,768,566 ------------ Distributions to shareholders from: Net investment income Class III (2,888,627) ------------ Net realized gains Class III (784,771) ------------ (3,673,398) ------------ Net share transactions: (Note 5) Class I 41,658 Class III 233,833,478 ------------ Increase in net assets resulting from net share transactions 233,875,136 ------------ Total increase in net assets 260,970,304 NET ASSETS: Beginning of period -- ------------ End of period (including accumulated undistributed net investment income of $1,209,863) $260,970,304 ============
8 See accompanying notes to the financial statements. GMO REIT FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS I SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM DECEMBER 31, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ----------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $12.58 ------ Income from investment operations: Net investment income 0.03 Net realized and unrealized gain 0.01 ------ Total from investment operations 0.04 ------ NET ASSET VALUE, END OF PERIOD $12.62 ====== TOTAL RETURN(A) 0.32% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $41 Net expenses to average daily net assets 0.82%* Net investment income to average daily net assets 3.17%* Portfolio turnover rate 21% Average broker commission rate per equity share $.0323 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: (b)
(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 waived or borne by the Manager were less than $0.01 per share. * Annualized. 9 See accompanying notes to the financial statements. GMO REIT FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM MAY 31, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ---------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $10.00 -------- Income from investment operations: Net investment income 0.24 Net realized and unrealized gain 2.60 -------- Total from investment operations 2.84 -------- Less distributions to shareholders: From net investment income (0.17) From net realized gains (0.05) -------- Total distributions (0.22) -------- NET ASSET VALUE, END OF PERIOD $12.62 ======== TOTAL RETURN(A) 28.49% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $260,929 Net expenses to average daily net assets 0.69%* Net investment income to average daily net assets 4.72%* Portfolio turnover rate 21% Average broker commission rate per equity share $.0323 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $0.02
(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. * Annualized. 10 See accompanying notes to the financial statements. GMO REIT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 1.SIGNIFICANT ACCOUNTING POLICIES The GMO REIT Fund (the "Fund"), which commenced operations on May 31, 1996, 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 into classes. The Fund seeks maximum total return through investment primarily in real estate investment trusts ("REITs"). The Fund offers three classes of shares: Class I, Class II and Class III. The principal economic difference among 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 generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of the financial statements in accordance with generally accepted accounting principles 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 investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. FUTURES CONTRACTS The Fund may purchase and sell futures contracts on domestic stock indicies. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a specified price 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 purchase of 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 obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily 11 GMO REIT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 held as of February 28, 1997. 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. SECURITY LENDING The Fund may lend its securities to certain member firms of the New York Stock Exchange. 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 28, 1997, the Fund loaned securities having a market value of $5,728,063, collateralized by cash in the amount of $5,974,600, 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 taxable 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 federal income tax purposes. Therefore, no provision for 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 semiannually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of 12 GMO REIT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for return of capital dividends. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules from generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ----------------- ------------------------ --------------- ($97,752) $97,752 --
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 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. 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 in such manner as deemed equitable by the Trustees, 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 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. 13 GMO REIT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases and fee on redemptions of Fund shares is .75% of the amount invested or redeemed. All purchase premiums and redemption fees are paid to and recorded as paid-in capital by the Fund. For the period ended February 28, 1997, the Fund received $1,756,192 in purchase premiums and $15,953 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 .75% of average daily net assets. The Fund has adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares, and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice 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) exceed .54% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the period ended February 28, 1997 was $305. 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 28, 1997, aggregated $252,611,024 and $23,854,592, respectively. 4.PRINCIPAL SHAREHOLDERS At February 28, 1997, 81% of the outstanding Class I shares of the Fund were held by three shareholders, and 23% of the outstanding Class III shares of the Fund were held by one shareholder, each holding in excess of 10% of the outstanding shares of the respective class. 14 GMO REIT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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, 1996 (commencement of operations) to February 28, 1997 Class I: ------------------------------ Shares Amount -------------- --------------- Shares sold 3,284 $ 41,658 Shares issued to shareholders in reinvestment of distributions -- -- Shares repurchased -- -- ------------- --------------- Net increase 3,284 $ 41,658 ============= =============== Period from May 31, 1996 (commencement of operations) to February 28, 1997 Class III: ------------------------------ Shares Amount -------------- --------------- Shares sold 20,722,033 $ 234,377,685 Shares issued to shareholders in reinvestment of distributions 180,673 2,193,376 Shares repurchased (230,093) (2,737,583) ------------- --------------- Net increase 20,672,613 $ 233,833,478 ============= ===============
6.FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 1997 is as follows: LONG FUTURES CONTRACTS
Number of Expiration Net Unrealized Contracts Type Date Contract Value Appreciation --------- ------- ---------- -------------- -------------- 16 S&P 500 March 1997 $6,323,200 $305,928 ========
At February 28, 1997, the Fund has sufficient cash and/or securities to cover any commitments or margin on open futures contracts. 15 GMO REIT FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION -- (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 12.73% of distributions as net capital gain dividends. 16 GMO REIT FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Mr. R. Jeremy Grantham, Mr. Richard McQuaid and Mr. Robert Brokaw are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham has been with Grantham, Mayo, Van Otterloo & Co. LLC since its founding in 1977. Mr. McQuaid has been at GMO for three years and Mr. Brokaw has been with the firm for nine years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO REIT Fund returned 28.5% from the Fund's inception (May 31, 1996) to February 28, 1997 while the Morgan Stanley REIT Index (MSRI) returned 29.8% and the S&P 500 returned 20.0% during the same period. REIT Industry Review Since the Fund's inception on May 31, 1996, the REIT market has been led by the strong performance of commercial office buildings and hotels, followed by industrial properties. Regional shopping malls rebounded strongly after June. Apartments lagged this year following good performance in the three prior years. Shopping centers also lagged, although performance improved considerably over the previous year. Fundamental Stock Selection The Fund's fundamental valuation process analyzes individual companies and also utilizes top-down sector analysis to analyze properties by their geography and property type. Our fundamental research looks out one to two years and is heavily weighted towards stocks with attractive valuations. During the Fund's first seven months, these investment streams underperformed the index, primarily due to the outperformance of growth- oriented REITs during the period. Quantitative Stock Selection In addition to a fundamental valuation approach, the Fund utilizes two quantitative models. One model selects sectors (or property types) on the basis of their short-term return performance, and the other selects individual stocks on the basis of their long-term return momentum. Our sector selection model, which has a quick response to changing momentum, added to the Fund's relative performance, as did the long-term momentum model. 17 GMO REIT FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- Implementation Implementation negatively impacted the Fund's underperformance relative to the MSRI during the year. The large inflow of new investors to the REIT market, particularly in the last quarter of the calendar year, disrupted valuations somewhat. Additionally, there is no satisfactory, liquid means to gain immediate real estate exposure when new cash flows are taken into the Fund. As an alternative to holding cash, the Fund utilizes S&P Mid-Cap futures and S&P 500 futures to temporarily gain equity market exposure until new funds are invested. This strategy protected our clients against a significant portion of the risk of holding cash, but hurt relative performance during a period when REIT stocks strongly outperformed relative to U.S. equities (nearly 13% during the fourth quarter of 1996 alone). Outlook The Fund's holdings are broadly representative of the REIT market as a whole. As an asset class, REITs are attractively priced relative to large capitalization U.S. equities. They are priced at close to their fair value and have higher yields than do equities. Further, the REIT market is capturing the attention of institutional investors as an attractive alternative to the less liquid private market for real estate investing. The resulting influx of capital to the REIT market will further its institutionalization, improving discovery and liquidity over the next few years. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co LLC Management. They are not meant as investment advice. 18 Comparison of Change in Value of a $10,000 Investment in GMO REIT Fund Class III shares and the MSCI REIT Index As of February 28, 1997 Average Annual Total Return
Since Inception 1 Year 5 Year 05/31/96 Class II n/a n/a 26.6% 12/31/96 Class I n/a n/a -0.7% [Line Graph Appears Here] Date GMO REIT Fund MSCI REIT Index S&P 500 Index 01/01/96 05/31/96 9,925 10,000 10,000 02/28/97 12,660 12,982 12,005
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 75 bp on the purchase and 75 bp on the redemption. Transaction fees are paid to the Fund to cover trading costs. Performance for Class I will be different due to higher shareholder service fees. Class II shares have not commenced operations. Past performance is not indicative of future performance. Information is unaudited. GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 1997 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO WORLD EQUITY ALLOCATION FUND (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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the period from June 28, 1996 (commencement of operations) to February 28, 1997, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian, provides a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 22, 1997 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- MUTUAL FUNDS -- 100.0% 222,302 GMO Core Fund (Class III Shares) 4,472,710 58,969 GMO Currency Hedged International Bond Fund (Class III Shares) 717,066 259,731 GMO Currency Hedged International Core Fund (Class III Shares) 3,295,986 78,725 GMO Emerging Country Debt Fund (Class III Shares) 1,109,235 677,857 GMO Emerging Markets Fund (Class III Shares) 8,466,439 45,122 GMO Growth Fund (Class III Shares) 233,731 104,631 GMO International Bond Fund (Class III Shares) 1,127,921 769,616 GMO International Core Fund (Class III Shares) 18,763,239 90,698 GMO International Small Companies Fund (Class III Shares) 1,220,791 176,875 GMO REIT Fund (Class III Shares) 2,232,166 96,917 GMO Small Cap Growth Fund (Class III Shares) 951,726 116,023 GMO Small Cap Value Fund (Class III Shares) 1,843,605 117,339 GMO Value Fund (Class III Shares) 1,742,488 ----------- TOTAL MUTUAL FUNDS (COST $44,807,281) 46,177,103 ----------- SHORT-TERM INVESTMENT-- 0.0% REPURCHASE AGREEMENT -- 0.0% $ 2,462 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97,with a maturity value of $2,463. and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $2,514. 2,462 ----------- TOTAL SHORT-TERM INVESTMENT (COST $2,462) 2,462 ----------- TOTAL INVESTMENTS -- 100.0% (Cost $44,809,743)* 46,179,565 Other Assets and Liabilities (net) (9,273) ----------- TOTAL NET ASSETS -- 100% $46,170,292 =========== NOTES TO THE SCHEDULE OF INVESTMENTS:
* The aggregate identified cost for federal income tax purposes is $44,879,481, resulting in gross unrealized appreciation and depreciation of $1,543,537 and $243,453, respectively, and net unrealized appreciation of $1,300,084. See accompanying notes to the financial statements. 1 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $44,809,743) (Note 1) $46,179,565 Receivable for expenses waived or borne by Manager (Note 2) 5,735 ----------- Total assets 46,185,300 ----------- LIABILITIES: Payable to affiliate for (Note 2): Shareholder service fee 942 Accrued expenses 14,066 ----------- Total liabilities 15,008 ----------- NET ASSETS $46,170,292 =========== NET ASSETS CONSIST OF: Paid-in-capital $44,429,227 Accumulated undistributed net realized gain 371,243 Net unrealized appreciation 1,369,822 ----------- $46,170,292 =========== NET ASSETS ATTRIBUTABLE TO: Class I shares $ 9,424,152 =========== Class III shares $36,746,140 =========== SHARES OUTSTANDING: Class I 896,088 =========== Class III 3,494,003 =========== NET ASSET VALUE PER SHARE: Class I $ 10.52 =========== Class III $ 10.52 ===========
See accompanying notes to the financial statements. 2 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- PERIOD FROM JUNE 28, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 168,303 Interest 131 ---------- Total income 168,434 ---------- EXPENSES: Audit fees 14,167 Custodian and transfer agent fees 13,995 Registration fees 3,785 Legal fees 326 Trustees fees (Note 2) 43 Miscellaneous 675 Fees waived or borne by Manager (Note 2) (31,046) ---------- 1,945 Shareholder service fee (Note 2) Class I 5,781 Class II 838 ---------- Net expenses 8,564 ---------- Net investment income 159,870 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Investments (2,617) Realized gain distributions from investment company shares 637,191 ---------- Net realized gain 634,574 ---------- Change in net unrealized appreciation (depreciation) on investments 1,369,822 ---------- Net realized and unrealized gain 2,004,396 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,164,266 ==========
See accompanying notes to the financial statements. 3 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD FROM JUNE 28, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ---------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 159,870 Net realized gain 634,574 Change in net unrealized appreciation (depreciation) 1,369,822 ----------- Net increase in net assets resulting from operations 2,164,266 ----------- Distributions to shareholders from: Net investment income Class I (95,107) Class III (64,763) ----------- Total distributions from net investment income (159,870) ----------- In excess of net investment income Class I (702) Class III (478) ----------- (1,180) ----------- Net realized gains Class I (157,650) Class III (104,501) ----------- Total distributions from net realized gains (262,151) ----------- (423,201) ----------- Net share transactions: (Note 5) Class I 9,038,695 Class II (24,488) Class III 35,415,020 ----------- Increase in net assets resulting from net share transactions 44,429,227 ----------- Total increase in net assets 46,170,292 NET ASSETS: Beginning of period -- ----------- End of period $46,170,292 ===========
See accompanying notes to the financial statements. 4 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS I SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JUNE 28, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ---------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $10.00 ------ Income from investment operations: Net investment income 0.09 (b) Net realized and unrealized gain 0.72 ------ Total from investment operations 0.81 ------ Less distributions to shareholders: From net investment income (0.11) In excess of net investment income (0.00) From net realized gains (0.18) ------ Total distributions (0.29) ------ NET ASSET VALUE, END OF PERIOD $10.52 ====== TOTAL RETURN(A) 8.23% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $9,424 Net expenses to average daily net assets 0.16%* Net investment income to average daily net assets 1.80%*(b) Portfolio turnover rate 31% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.01
(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) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. * Annualized. See accompanying notes to the financial statements. 5 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS II SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JUNE 28, 1996 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 16, 1996 ---------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $10.00 ------ Income from investment operations: Net investment income 0.04(b) Net realized and unrealized gain 0.02 ------ Total from investment operations 0.06 ------ NET ASSET VALUE, END OF PERIOD $10.06 ====== TOTAL RETURN(A) .60% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ -- Net expenses to average daily net assets 0.12%* Net investment income to average daily net assets 1.55%*(b) Portfolio turnover rate 31% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.01
(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) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. * Annualized. See accompanying notes to the financial statements. 6 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM OCTOBER 22, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ---------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $10.07 ------- Income from investment operations: Net investment income 0.11 (b) Net realized and unrealized gain 0.63 ------- Total from investment operations 0.74 ------- Less distributions to shareholders: From net investment income (0.11) In excess of net investment income (0.00) From net realized gains (0.18) ------- Total distributions (0.29) ------- NET ASSET VALUE, END OF PERIOD $10.52 ======= TOTAL RETURN(A) 7.51% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $36,746 Net expenses to average daily net assets 0.00%* Net investment income to average daily net assets 0.91%*(b) Portfolio turnover rate 31% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.03
(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) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. *Annualized. See accompanying notes to the financial statements. 7 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 1.SIGNIFICANT ACCOUNTING POLICIES The GMO World Equity Allocation Fund (the "Fund"), which commenced operations on June 28, 1996, 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 a total return greater than that of the World Lite Extended Index, a modification of the Morgan Stanley Capital International World Index that reduces the weighting of Japan and includes a weighting for emerging countries. The Fund will pursue its objective by investing primarily in Class III shares of equity funds of the Trust. The Fund offers three classes of shares: Class I, Class II and Class III. The principal economic difference among 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 generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 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. 8 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules from generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ----------------- ------------------------ --------------- $1,180 ($1,180) --
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. 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. 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 in such manner as deemed equitable by the Trustees, 9 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 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. 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 .69% of the amount invested. In the case of cash redemptions, the fee is .09% of the amount redeemed. Prior to October 16, 1996, the Fund did not charge a premium on cash purchases or a fee on redemptions. All purchase premiums and redemption fees are paid to and recorded as paid-in capital by the Fund. For the period ended February 28, 1997, the Fund received $142,906 in purchase premiums and no redemption fees. There is no premium for reinvested distributions or in-kind transactions. 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 fees from the underlying funds in which the Fund invests. The Fund has adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .13% for Class I shares and .07% for Class II shares. No shareholder service fee is charged for Class III shares. GMO has agreed to reimburse all expenses until further notice (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses). Prior to November 25, 1996, GMO had agreed to reimburse these expenses to the extent that the Fund's annual 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 period ended February 28, 1997 was $43. 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 28, 1997, aggregated $50,571,252 and $5,761,354, respectively. 10 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 4.PRINCIPAL SHAREHOLDERS At February 28, 1997, 100% of the outstanding Class I shares of the Fund were held by three shareholders and 97% of the outstanding Class III shares of the Fund were held by two shareholders, each holding in excess of 10% of the outstanding shares of the respective class. 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 28, 1996 (commencement of operations) to February 28, 1997 Class I: ------------------------------ Shares Amount -------------- --------------- Shares sold 870,993 $ 8,785,236 Shares issued to shareholders in reinvestment of distributions 25,095 253,459 Shares repurchased -- -- ------------- --------------- Net increase 896,088 $ 9,038,695 ============= =============== Period from June 28, 1996 (commencement of operations) to February 28, 1997 Class II: ------------------------------ Shares Amount -------------- --------------- Shares sold 412,344 $ 4,123,441 Shares issued to shareholders in reinvestment of distributions -- -- Shares repurchased (412,344) (4,147,929) ------------- --------------- Net increase (decrease) -- $ (24,488) ============= =============== Period from October 22, 1996 (commencement of operations) to February 28, 1997 Class III: ------------------------------ Shares Amount -------------- --------------- Shares sold 3,482,496 $ 35,298,804 Shares issued to shareholders in reinvestment of distributions 11,507 116,216 Shares repurchased -- -- ------------- --------------- Net increase 3,494,003 $ 35,415,020 ============= ===============
11 GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION -- (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 28.75% of distributions as net capital gain dividends. 12 [THIS PAGE INTENTIONALLY LEFT BLANK] 13 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 five years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class I shares of the GMO World Equity Allocation Fund returned 8.2% for the eight months from its inception (June 28, 1996) to February 28, 1997. During that period the Fund's benchmark (GMO World Lite Extended) returned 11.3%. This period was a strong extension of the longest continuous bull market in U.S. equities this century. After a brief pause during July, U.S. stocks set 42 new highs in the next 117 sessions, with the S&P 500 returning an impressive 20%. International stocks lagged somewhat, with the EAFE Lite Index up 4.3% and the IFC Investable Index of emerging markets up 9.5%. We use GMO's long-term asset class forecasts to allocate the World Equity Allocation Fund among various GMO mutual funds. From the inception of the Fund we have felt that the U.S. stock market is significantly overvalued. The market's subsequent climb has only made this situation more extreme. Our research suggests that from the market's current valuation level, prospective returns for large capitalization U.S. stocks over the next 10 years will be very disappointing, with a forecasted average annual return of only 3% per year. The Fund is underweight in U.S. stocks by approximately 15% relative to the benchmark. This bet negatively impacted the Fund's overall performance due to the continuing rally of U.S. equities relative to the international markets during the period. Within the U.S. equity portion of the portfolio, we have tilted the portfolio towards the most attractively valued sectors: small stocks, where we have a 6% overweighting, and real estate investment trusts (REITs), where our overweighting is 5%. Since the Fund's inception, the allocation to REITs has helped performance, as the GMO REIT Fund outperformed the aggregate U.S. market by 7% over the period. Small stocks, on the other hand, lagged by approximately 6%. Within the international equity portion of the Fund, we have overweighted emerging equities. The impact of the overweight to emerging equities has been approximately flat since the inception of the Fund. Emerging equities underperformed the benchmark through the end of the calendar year, but have outperformed the benchmark by approximately an equal amount during the first two months of 1997. Our implementation of emerging equities has added value as well, with the GMO Emerging Markets Fund up 15.1% through the end of February. In December we added some fixed income exposure to the portfolio, and our allocation to it stands at 6% of the total. Our allocation was 3.6% to international bonds and 2.4% to emerging country debt. Due to the strong performance of emerging country debt during this period, the fixed income portion of the portfolio has trailed U.S. stocks only slightly during this period and has not materially affected performance. Until we see a significant correction in U.S. equities, it is likely that the Fund will maintain its bearish stance. The moderately sized fixed income position should provide a degree of protection in a bear market, and we believe that international stocks, particularly in emerging markets, will perform better than those in the U.S. In addition, REITs should do well in the current market environment, providing more attractive yields and valuations than available from the high valuation levels of U.S. equities. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management. They are not meant as investment advice. 14 Comparison of Change in Value of a $10,000 Investment in GMO World Equity Allocation Fund Class I shares and the MSCI World Index As of February 28, 1997 Average Annual Total Return
Since Inception 1 Year 5 Year 06/28/96 Class I n/a n/a 7.4% 10/22/96 Class II n/a n/a 6.7%
[Line Graph Appears Here]
Date GMO World Equity Allocation Fund GMO EAFE Lite Extended Index MSCI World 01/01/96 06/28/96 9,931 10,000 10,000 02/28/97 10,740 11,132 10,844
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 69 bp on the purchase and 9 bp on the redemption. Transaction fees are paid to the Fund to cover trading costs. Performance for Class III shares may be different due to lower shareholder service fees. Class II shares have not commenced operations. Past performance is not indicative of future performance. Information is unaudited. GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 1997 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 28, 1997, the results of its operations, the changes in its net assets and the financial highlights for the period from July 29, 1996 (commencement of operations) to February 28, 1997, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 28, 1997 by correspondence with the custodian, provides a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 22, 1997 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 1997
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------ MUTUAL FUNDS -- 100.1% 141,033 GMO Core Fund (Class III Shares) 2,837,579 150,034 GMO Currency Hedged International Bond Fund (Class III Shares) 1,824,415 140,971 GMO Currency Hedged International Core Fund (Class III Shares) 1,788,928 630,010 GMO Domestic Bond Fund (Class III Shares) 6,413,502 46,526 GMO Emerging Country Debt Fund (Class III Shares) 655,554 124,916 GMO Emerging Markets Fund (Class III Shares) 1,560,197 26,751 GMO Growth Fund (Class III Shares) 138,570 34,012 GMO International Bond Fund (Class III Shares) 366,651 63,684 GMO International Core Fund (Class III Shares) 1,552,628 14,182 GMO International Small Companies Fund (Class III Shares) 190,886 101,975 GMO REIT Fund (Class III Shares) 1,286,919 55,618 GMO Small Cap Growth Fund (Class III Shares) 546,171 66,459 GMO Small Cap Value Fund (Class III Shares) 1,056,037 67,356 GMO Value Fund (Class III Shares) 1,000,241 ----------- TOTAL MUTUAL FUNDS (COST $20,444,188) 21,218,278 ----------- SHORT-TERM INVESTMENT -- 0.0% REPURCHASE AGREEMENT -- 0.0% $1,530 Salomon Brothers Repurchase Agreement, dated 2/28/97, due 3/3/97, with a maturity value of $1,531. and an effective yield of 4.85%, collateralized by U.S. Treasury Obligations with rates ranging from 7.25% to 11.88%, with maturity dates ranging from 11/15/03 to 5/15/20 and with an aggregate market value of $1,563. 1,530 ----------- TOTAL SHORT-TERM INVESTMENT (COST $1,530) 1,530 ----------- TOTAL INVESTMENTS -- 100.1% (Cost $20,445,718) * 21,219,808 Other Assets and Liabilities (net) -- (0.1)% (12,229) ----------- TOTAL NET ASSETS -- 100% $21,207,579 =========== NOTES TO THE SCHEDULE OF INVESTMENTS: * The aggregate identified cost for federal income tax purposes is $20,445,718, resulting in gross unrealized appreciation and depreciation of $800,136 and $26,046, respectively, and net unrealized appreciation of $774,090.
See accompanying notes to the financial statements. 1 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $20,445,718) (Note 1) $21,219,808 Receivable for Fund shares sold 49,845 ----------- Total assets 21,269,653 ----------- LIABILITIES: Payable for investments purchased 50,000 Payable to affiliate for (Note 2): Shareholder service fee 1,454 Accrued expenses 10,620 ----------- Total liabilities 62,074 ----------- NET ASSETS $21,207,579 =========== NET ASSETS CONSIST OF: Paid-in-capital $20,277,679 Accumulated undistributed net realized gain 155,810 Net unrealized appreciation 774,090 ----------- $21,207,579 =========== NET ASSETS ATTRIBUTABLE TO: Class I shares $ 6,848,458 =========== Class II shares $14,359,121 =========== SHARES OUTSTANDING: Class I 612,128 =========== Class II 1,283,396 =========== NET ASSET VALUE PER SHARE: Class I $ 11.19 =========== Class II $ 11.19 ===========
2 See accompanying notes to the financial statements. GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- PERIOD FROM JULY 29, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 69,109 Interest 69 ---------- Total income 69,178 ---------- EXPENSES: Audit fees 14,175 Custodian and transfer agent fees 3,396 Registration fees 2,052 Legal fees 101 Miscellaneous 683 Fees waived or borne by Manager (Note 2) (19,894) ---------- 513 Shareholder service fee (Note 2) Class I 3,100 Class II 1,523 ---------- Net expenses 5,136 ---------- Net investment income 64,042 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Investments 86,460 Realized gain distributions from investment company shares 120,208 ---------- Net realized gain 206,668 ---------- Change in net unrealized appreciation (depreciation) on investments 774,090 ---------- Net realized and unrealized gain 980,758 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,044,800 ==========
See accompanying notes to the financial statements. 3 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD FROM JULY 29, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ---------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 64,042 Net realized gain 206,668 Change in net unrealized appreciation (depreciation) 774,090 ----------- Net increase in net assets resulting from operations 1,044,800 ----------- Distributions to shareholders from: Net investment income Class I (64,042) ----------- In excess of net investment income Class I (1,958) ----------- Net realized gains Class I (48,900) ----------- (114,900) ----------- Net share transactions: (Note 5) Class I 6,386,281 Class II 13,891,398 ----------- Increase in net assets resulting from net share transactions 20,277,679 ----------- Total increase in net assets 21,207,579 NET ASSETS: Beginning of period -- ----------- End of period $21,207,579 ===========
4 See accompanying notes to the financial statements. GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS I SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JULY 29, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ---------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $10.00 ------ Income from investment operations: Net investment income 0.22(b) Net realized and unrealized gain 1.35 ------ Total from investment operations 1.57 ------ Less distributions to shareholders: From net investment income (0.22) In excess of net investment income (0.00) From net realized gains (0.16) ------ Total distributions (0.38) ------ NET ASSET VALUE, END OF PERIOD $11.19 ====== TOTAL RETURN (A) 15.85% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $6,848 Net expenses to average daily net assets 0.15%* Net investment income to average daily net assets 2.75%*(b) Portfolio turnover rate 33% Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.03
(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) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. *Annualized. See accompanying notes to the financial statements. 5 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS II SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM DECEMBER 31, 1996 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1997 ----------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.86 ------- Income from investment operations: Net investment income -- (b) Net realized and unrealized gain 0.33 ------- Total from investment operations 0.33 ------- NET ASSET VALUE, END OF PERIOD $ 11.19 ======= TOTAL RETURN(A) 3.04% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $14,359 Net expenses to average daily net assets 0.07 %* Net investment income to average daily net assets (0.07)%*(b) Portfolio turnover rate 33 % Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.01
(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) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. * Annualized. 6 See accompanying notes to the financial statements. GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 1.SIGNIFICANT ACCOUNTING POLICIES The GMO Global Balanced Allocation Fund (the "Fund"), which commenced operations on July 29, 1996, 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 a total return greater than that of the GMO Global Balanced Index, a benchmark developed by the Manager. The Fund will pursue its objective by investing primarily in Class III shares of domestic equity, international equity, and fixed income funds of the Trust. The Fund offers three classes of shares: Class I, Class II and Class III. The principal economic difference among 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 generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles 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. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. 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. 7 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 taxable 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 federal income tax purposes. Therefore, no provision for 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. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. The following reclassification represents the cumulative amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1997. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules from generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments.
Undistributed Net Accumulated Net Realized Paid-in Investment Income Gain/(Loss) Capital ----------------- ------------------------ -------- $1,958 ($1,958) --
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. 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. 8 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 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 in such manner as deemed equitable by the Trustees, 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 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. 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 .31% of the amount invested. In the case of cash redemptions, the fee is .03% of the amount redeemed. Prior to October 16, 1996, the Fund did not charge a premium on cash purchases or a fee on redemptions. All purchase premiums and redemption fees are paid to and recorded as paid-in capital by the Fund. For the period ended February 28, 1997, the Fund received $53,056 in purchase premiums and no redemption fees. There is no premium for reinvested distributions or in-kind transactions. 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 fees from the underlying funds in which the Fund invests. The Fund has adopted a Shareholder Services Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Services Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .13% for Class I shares and .07% for Class II shares. No shareholder service fee is charged for Class III shares. GMO has agreed to reimburse all expenses until further notice (excluding brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses). Prior to November 25, 1996, GMO had agreed to reimburse these expenses to the extent that the Fund's annual expenses exceeded .05% of average daily net assets. For the period ended February 28, 1997, the Fund incurred no Trustees fees. 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 28, 1997, aggregated $22,845,568 and $2,487,840, respectively. 9 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 1997 - -------------------------------------------------------------------------------- 4.PRINCIPAL SHAREHOLDERS At February 28, 1997, 96% of the outstanding Class I shares of the Fund were held by four shareholders and 99% of the outstanding Class II shares of the Fund were held by one shareholder, each holding in excess of 10% of the outstanding shares of the respective class. 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, 1996 (commencement of operations) to February 28, 1997 Class I: ----------------------------- Shares Amount ----------------------------- Shares sold 601,548 $ 6,271,381 Shares issued to shareholders in reinvestment of distributions 10,580 114,900 Shares repurchased -- -- ------------- --------------- Net increase 612,128 $ 6,386,281 ============= =============== Period from December 31, 1996 (commencement of operations) to February 28, 1997 Class II: ----------------------------- Shares Amount ----------------------------- Shares sold 1,283,396 $ 13,891,398 Shares issued to shareholders in reinvestment of distributions -- -- Shares repurchased -- -- ------------- --------------- Net increase 1,283,396 $ 13,891,398 ============= ===============
10 GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION--(UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1997, all of the Fund's distributions are from investment company taxable income. 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 five years. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class I shares of the Global Balanced Allocation Fund returned 15.8% for the seven months from its inception (July 29, 1996) to February 28, 1997. During that period the benchmark (48.75% S&P 500/16.25% GMO EAFE-Lite Extended/35% Lehman Aggregate) returned 16.3%. This period was an strong extension of the longest continuous bull market in U.S. equities this century. Over this period U.S. stocks set 42 new highs in 117 sessions, rising by over 26%. International stocks lagged the U.S. equity market, with the EAFE-Lite Index returning 6% and the IFC Investable Index of emerging markets returning 17% for the period. We use GMO's long-term asset class forecasts to allocate the Global Balanced Allocation Fund among various GMO mutual funds. From the inception of the Fund we have felt that the U.S. stock market is significantly overvalued. The market's subsequent climb has only made this situation more extreme. Our research suggests that from the market's current valuation level, prospective returns for large capitalization U.S. stocks over the next 10 years will be very disappointing at only 3% per year. The Fund is underweight in U.S. stocks in the portfolio by approximately 16% relative to the benchmark. This underweight negatively impacted the Fund's overall performance as U.S. equities outperformed the international markets during the period. Within U.S. stocks, we have tilted the portfolio towards the most attractively valued sectors: small stocks, where we have a 7% overweight, and real estate investment trusts (REITs), where our overweight is 5%. Since the Fund's inception, the GMO REIT Fund has kept up with the overall market over the period. Small stocks, on the other hand, have lagged by approximately 7%. Within the international equity portion of the Fund, we have overweighted emerging equities. The impact of the overweighting to emerging equities have been approximately flat since the inception of the Fund. Emerging equities underperformed the benchmark through the end of the calendar year, but have outperformed the benchmark by approximately an equal amount during the first two months of 1997. Our implementation of emerging equities has added value as well, with the GMO Emerging Markets Fund up 15.1% through the end of February. Since the inception of the fund we have been overweight by approximately 9% in fixed income, with allocations to international and emerging bonds along with U.S. fixed income. The inclusion of the international and in particular, emerging bonds, added the majority of value added to the Fund's performance for the year. We have now pared back our allocation to emerging debt, which has rallied significantly since 1994, from a high of nearly 8% to a current allocation of 3% of the account. Until we see a significant correction in U.S. equities, it is likely that the Fund will maintain its bearish stance and fixed income overweighting. Our fixed income position should provide a degree of protection in a bear market, and we believe that international stocks, particularly in emerging markets, will perform better than those in the U.S. In addition, REITs should do well in such an environment, with their high yields and reasonable valuations sparing them the worst of a U.S. market fall. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management. They are not meant as investment advice. 12 Comparison of Change in Value of a $10,000 Investment in GMO Global Balanced Allocation Fund Class I shares and the Lehman/MSCI World Index* As of February 28, 1997
Average Annual Total Return Since Inception 1 Year 5 Year 07/29/96 Class I n/a n/a 15.5% 12/31/96 Class II n/a n/a 2.7%
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Date GMO Global Balanced Allocation Fund GMO Global Balanced Index 50% Lehman Aggregate/50% MSCI World 01/01/96 07/29/96 9,969 10,000 10,000 02/28/97 11,550 10,973 11,627
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 waived during the periods shown, and do not include the effect of taxes on reinvested distributions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 31 bp on the purchase and 3 bp on the redemption. Transaction fees are paid to the Fund to cover trading costs. Performance for Class II shares may be different due to lower shareholder service fees. Class III shares have not commenced operations. Past performance is not indicative of future performance. Information is unaudited. * 50% Lehman Brothers Gov't Bond Index/MSCI World Index -----END PRIVACY-ENHANCED MESSAGE-----